Generational Wealth: what is it and how to build it

Generational wealth isn’t a new concept. The rich have known about it for years and have benefitted from this knowledge and power. It is only more recently that we are seeing an increase in interest around generational wealth from those demographics that have been previously excluded.

As people look to build their own wealth, it is natural that they turn their attention to what might happen to future generations. What will they inherit? What do we want them to inherit? And what action can be taken now to improve those prospects?

If these are the questions that you have been asking, then you are in the right place. This article covers the topic of generational wealth in all the detail you need to go out there and make it happen.

What is generational wealth?

Putting simply it is the passing down of money and assets from generation to generation. This is sometimes referred to as inheritance, family wealth or legacy wealth. It can include the passing down of cash, property, stocks and shares, businesses, and more.

Anything that is left behind that can benefit the next generation financially is considered generational wealth. It contributes to ensuring a stable financial future for generations to come.

Who historically has benefited from generational wealth?

As with most things related to money, there are gaps in wealth that span across ages, races, and genders. For most of history, wealth has been held by old white men. Unfortunately, it seems that the picture, although improved, isn’t a lot better now.

Historically, homes and wealth were passed from fathers to the oldest son. This tradition might seem like something out of a Jane Austin novel, but it carried on until fairly recently. Some still practice this, just look at the Royal Family for example.

Generational wealth by generation

The generation called the Baby Boomers have seen the biggest increase in wealth in their lifetime. They still hold most of the wealth in the UK today. They benefited from a huge increase in house prices. It saw them grow their assets like no other generation before them or since. More than 70% of the wealth in the UK is held by Baby Boomers and the Silent Generation.

Gen X isn’t doing too badly. They are now receiving inheritance as their parents’ generation is passing wealth on to them. However, they still have only half of the wealth that Baby Boomers have, even when compared at equivalent ages. The upside is that they are doing far better than Millennials.

In the battle of generational wealth, Millennials are probably losing as an age group. They have just one-fifth of the wealth of Gen X who are already trailing behind the Baby Boomers. Some cite that it is increased house prices combined with stagnant wage growth that is to blame, whilst others note that recessions (and now a global pandemic) probably haven’t helped.

Generational wealth by ethnicity

Looking at racial disparities in generational wealth, it is clear that different ethnicities are starting the journey to generational wealth at different points. The average net worth of households with a white British background was £314,000 compared to £34,000 for black African families.

There is a multitude of reasons for this including pay gaps and racism within the finance sector. One study showed that black families were more likely to have a mortgage application refused compared to white families in similar circumstances. This blocks access to the vehicle that can help build wealth.

Generational wealth by gender

There are also differences when it comes to gender. The average woman has 91% of the wealth of her male counterparts. This can be attributed to aspects such as maternity leave, part-time work, and the fact that women are more likely to be earning a minimum wage.

There are differences in how women hold wealth compared to men. Although there are similar rates of homeownership, women are more likely to keep money as cash. Men on the other hand are more likely to hold stocks and shares.

Why build generational wealth?

Although building wealth sounds nice, there is more to it than just enjoying starting at the increasing figures. Think about how your life may have been different if you had grown up in a wealthier household.

For example, if your parents had the funds to pay for you to go to university loan-free or paid for your first car. This could potentially have helped you avoid debt in your early adulthood and put you on a path to build your own wealth.

More than that, families with wealth have more opportunities and can take more risks. Drawing on my personal experience here, I have never once worried about being homeless because I know that my parents have the money to help me out if I needed it. This is my priviledge, but it meant that I’ve not worried about taking chances in my life, such as buying a house when I was young and quiting my job to travel the world.

Every bit of wealth that is passed to the next generation means that that generation doesn’t have to start from scratch. It might mean a house deposit to get them on the property ladder or money for a car so that they don’t get a loan.

How to build generational wealth

There are three steps to creating generational wealth: creating it, growing it, and protecting it. You need each step to work if you are the first generation that is creating wealth. If you are second or third generation, then you can add to it, but your role will most be building on it.

1. Creating start-up wealth

At the very beginning of this journey you are going to need some money. There are lots of places that this money can come from, but below I have generalised them into three main sources.

Get a day job

Chances are you already have one of these, and they are one of the simplest ways to start building up your pot of wealth. A regular income makes it easier to budget and even small amount can create a big amount of money over time.

You can adopt frugal living practices and reduce your spending to increase the gap between your income and your expenses. The gap between the two, then become the money that you are going to invest and grow later.

Furthermore, if you are looking to increase your income, then it can be wise to look at the opportunityies within your career. Are there promotions or pay rises available to you? Learning new skills and making yourself more attractive to employers is a great way to get yourself noticed and move up the career ladder.

Start a side hustle

If you are looking for more than your day job can offer, then it might be wise to think about starting a side hustle. Side hustles have lots of benefits that go beyond just the financial impact. They can be a chance to use old skills or try new ones, or to start your own business.

Side hustles and wealth are intrinsically linked. Most side hustle income is additional income meaning that it is not require to pay for our bills and general household expenses. This means that it can be used to build our savings and investments and can be a great vehicle for creating generational wealth.

Work on passive income

The first two suggestions are great, but they largely require you exchange your time for money. Passive income is a better way to go. This is money that is made without ongoing input from you. Check out some of my favourite passive income ideas in this video.

Normally with passive income you need either a cash or time injection at the start, and can then use this create something that provides income without you. Writing a book is a good example of this. You commit time to write it at the start, but once it is written it can provide income over and over again without you needing to do too much.

2. Growing your wealth

The next step once you have some money to work with is to turn it into more money. This could then create passive income, but as we are looking in this case to create some substantial assets to pass down through generations, then it is likely that returns on these would saved or reinvested to continue growing.

Investing in the stock market

This is one of the simplest ways to build wealth, but it is not without risk and requires some learning. It is not as difficult as most people think, and can be done online or via an app. Regular investments into a well-diversified portfolio can keep the low and produce modest results.

You can also benefit from the effects of compounding. This means that as you make money from the stock market market, you will start to make money from that money too. This continues on and on, and it can reach the point where more of your money comes from compounding rather than your deposits.

There are also tax-advantaged ways to do this, such as using stocks and shares ISA which means that you don’t have to pay tax on the money made through these accounts.

Pay into a pension

For many of us, this is our first form of investing. Better still is that many workplaces will create a pension for you, set you up to pay into it, and contribute to it too. Now pensions are designed for you to spend in your old age, therefore not all pension pots can be passed on.

There are some exceptions to this, however. For example, it is possible to take a lump sum from your pension when you reach a certain age. What you do with this is up to you, so you could potentially add this to other savings and investments. For full details, check out the Pensions Wise website or speak to your pension provider.

Investing in property

This is one of the most common ways that people in the UK have been building wealth. It is one of the reasons that the baby boomers are doing so well. An investment in property in this case can include the home that you live in.

When most people buy a house it is their intention that one day they will pay off that hom. When they die, the proprty is passed to their beneficiaries who can then keep it or sell it.

Some people take it further than this an buy additional properties. The view here is either to make an additional passive income stream from the rent or to benefit from increased house prices over time.

Start a business

Another less considered way of passing on wealth is through businesses. These can either be asset rich businesses that can be sold on or leveraged, or income-producing businesses which can provide ongoing wealth.

Family businesses are common, but more people are understanding the value that they have in building generational wealth. Plus, there are far more options for creating businesses these days.

It could be that you start a business as a side hustle that you can later pass on as an asset. You could work on having multiple businesses each generating income in different ways.

3. Protecting your wealth

The final part of any journey to creating generational wealth is protecting it. Making sure that the money passes from you to your children or grandchildren is an important step in the process.

Write a will

This is a key step. Without a will, it can leave your estate open to others that you had not intended to inherit. This is particularly important if you have multiple children, partners in your lifetime, or other beneficiaries that you would like to include.

It is also important to make this accessible and notify your executors of the location and your intentions. They have the important task of making sure that your wishes are carried out.

This should also be a document that you review frequently. As your assets and circumstances change over time, you will want to make sure that your will still serves you.

Depending on the complexity of your assets and circumstances, you may be able to complete the will yourself. There are several websites that offer this service for a small fee. For more complicated situations, it may be better to employ a solicitor to help you with this.

Speak to a financial adviser

If you feel that your assets are growing and you want to make sure that they are working best for you, then speak to a financial adviser. They will also be able to help you out with tax-efficiency and ensuring that your wealth is passed on smoothly.

Financial advice is a heavily regulated industry so make sure that you speak to someone qualified. It can be help to speak to friends and family who can give you recommendations. Alternatively, make some phone calls and ask questions before you book a session.

Name beneficiaries

This does not just apply to wills, but also for things such as pensions and insurances. Many workplaces will offer an in-service death grant, which is an amount that is paid out if you die whilst you are working there. But you need to name your beneficiaries if this should happen. Life insurance and pensions have a similar system, so do the research to find out how you can do this.

Life insurance

Although this is not technically about protecting your wealth it is about protecting your loved ones. Life insurance is design to support those left behind with bills and expenses. Some policies are tied to mortgages, so that it will pay it off if you die.

You can get as much life insurance as you want, but you will have to pay a monthly fee for the priviledge. Therefore, it is worth taking the time to speak with an insurance broker to determine an amount that is right for you.

The perks of having life insurance are that you will not be putting your family at greater risk. There are some families that end up out of pocket as the result of the death of a loved ones, which can add an extra challenge in the midst of grief. Life insurance can give them one less thing to worry about

Junior ISAs

Junior ISAs (Individual Savings Accounts) are savings or investment account for children that allow their money to grow tax-free. There are two types available: cash and stocks and shares. Each child is allowed to have one of each. Currently these have a £9,000 allowance per tax year.

These can be helpful for those looking to bolster their children’s futures sooner rather than later. Money placed into a JISA is only accessible to the child once they turn 18 and can’t be withdrawn by the parents either.

In addition to JISAs, it is possible to start paying in to pensions for children. There are several benefits to this, but it is important to remember that this money can’t be touched until retirement age which is likely to be 58+.

Teaching your children about building generational wealth

Data suggests that 70% of generational wealth is lost in the second generation and 90% in the third. Therefore investing in the financial education of the younger generations is some of the best action that you can take.

Pass on your knowledge and skills and show them how to build wealth of their own. Involving children in conversations about money from an early age normalises financial topics. Getting them to listen in to phone calls or helping you with banking or changing utilities providers helps with real world experience.

Make building generational wealth a family discussion and work on it together. Hold regular meetings with children, parents, grandparents and siblings to discuss ways that you can build wealth together.

How are you building generational wealth?

If you are on a journey to build generational wealth, then I’d love to hear from you. Use the comment section below to share your experiences.