Generational wealth refers to those assets, be they physical or financial, that you can pass on to family members of the next generation after your time.
These assets are often built through investments, as well as inheritance, but that wealth is not guaranteed from generation to generation without care and planning. Here are some commonly held beliefs about generational wealth that may be holding you back.
Generational Wealth Is Always Massive
The term wealth is misleading – just because you have something to pass on to family members after you doesn’t mean you’re a billionaire or even a millionaire.
According to Investopedia, more than half of American family inheritances were less than $50,000 between 1995 and 2016, and only 2% were more than $1 million.
Wealth is also defined differently from one family to another. Wealth to one family can mean enough money to retire on or pay for future children or grandchildren’s college fees. It may mean simply having a safety net in case of emergencies, or money to pass on as gifts.
Generational Wealth Is Easy To Achieve
If there’s already wealth in your family, or you know folks with generational wealth, you might have the perception that it came easily to them and that creating it for yourself is likewise going to be a cinch.
Generational wealth doesn’t usually happen overnight, however, according to Andrew Bernstein, JD, CFP, a wealth management advisor with All Points Wealth Management of Northwestern Mutual.
“Many people don’t fully understand the powers of compound interest and time. When you read stories about the millionaire next door, it’s not often that they invented something that brought them untold riches,” Bernstein explained. “Often, the people who build generational wealth do so through living below their means, staying accountable to a budget, investing early, and maintaining that strategy for many years.”
Generational Wealth Requires a High Income
You might think that if you don’t make a lot of money to begin with, that you’ll never build generational wealth. And while Bernstein said that starting out with a high income can obviously help, through career advancement and side hustles, you can increase your wealth, as well.
He also warns that wealth building is in large part about discipline, and overspending will counteract that quickly. “Financial discipline throughout your lifetime, while still taking time to enjoy your younger years, will leave you in a position to pass along wealth to children and grandchildren.”
Generational Wealth Lasts Forever
Smart investments and money management skills are not always passed down with wealth. A staggering 70% of wealthy families lose their wealth by the next generation, with 90% losing it the generation after that.
Sustaining substantial wealth takes financial savvy – something that not all rich parents are passing along to their heirs. Only 15% of parents in a recent CNBC+ Acorns survey said they talked about finances once a week with their children, and 34% said they never do. Without that education, and if money is spread across multiple children, any inheritance may be spent quickly without any means of recovery.
“Once you build generational wealth, then it becomes important to preserve and manage it properly,” Bernstein said. “Investment losses, poor tax planning, and differing values around money can lead future generations to inherit less or lose control of those funds sooner.”
Heirs Are Always Brought into the Family Business
When wealth is the result of a family business, not every child of wealth is given a roadmap of how to maintain and grow it. There may be little to no explanation of how the family business runs until or unless that child is asked to participate in it, if they are.
Some generations don’t even believe younger people are capable of handling money well. Financial advisers recommend breaking that cycle and giving the next generation a plan of action with directions on how to spend, save, give back in philanthropic efforts and build sustainable wealth.
Millionaires Usually Come From Generational Wealth
Not every person who makes millions comes from a family who has money.
According to a Ramsey Solutions survey of 10,000 millionaires, only 2% responded that they came from families considered “upper-income.” Millionaires who are self-made reported that they made their money through consistent and regular investing over time.
Wealth Is Recession-Proof
Even when there is some guidance given on how to invest the money passed down from the generation before, that guidance isn’t immune to the volatility of the markets.
If the family’s money is in stocks or real estate, those become worth a lot less if a recession hits. This could greatly drive down the family’s capital, destroying it in a matter of months if certain measures aren’t taken.
Generational Wealth Is Equitable
Equity gaps are still prevalent in the United States, and it can be harder for some people to obtain generational wealth than others.
According to Investopedia, as much as 76% of the nation’s wealth is held by the top 10% of people. Some of that is actually exacerbated by generational wealth staying within families. According to Federal Reserve data from 2018, almost 40% of intergenerational transfers of wealth were to those people in the top 10% of wealth.
These stats are even worse for non-white Americans who have long suffered from a “racial equity gap” that dates back to now illegal practices such as redlining, where minority families struggled to obtain home loans as compared to white Americans.
Additionally, according to the Federal Reserve, while 17% of white families can count on some kind of inheritance, only 6% of Black families, 4% of Hispanic families, and 15% of “other” families can. (This “other” group includes families that are Asian, American Indian, Alaska Native, Native Hawaiian, or Pacific Islander or have more than one racial identification.)
If your family falls into one of these categories, you may have to work harder to build generational wealth, though it isn’t impossible.
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Sam DiSalvo contributed to the reporting for this article.