Generational wealth is more than just a pipe dream. It’s the ability to support you and your family in the future to make decisions regarding investments, your personal lives, and your careers. While multiple strategies exist to establish generational wealth, some of the most effective ones are low-risk and stable options like private equity investments and multi-family syndication.
In this guide, we’ll explore these strategies, the key aspects of generational wealth, and how to build financial goals to attain it.
What Is Generational Wealth?
Generational wealth doesn’t have to be as grand as Rockefeller building an entire empire around oil. Instead, it involves building assets, investments, and financial strategies and passing them down to future generations.
Unlike short-term wealth accumulation, generational wealth focuses on creating a financial foundation that endures, offering stability and opportunity for family members long after you made the original investments.
Even if you already have a high net worth, you may not have generational wealt
h if your investments aren’t stable. You build generational wealth through investments that are more likely to endure market fluctuations in the near and distant future.
Why Generational Wealth Matters for Long-Term Prosperity
Money doesn’t always lead to happiness, but it can provide security that can benefit your health and future. According to a 2022 study published in the National Library of Medicine, those who have a lower income were more likely to experience psychological stress than those at the highest income level. Even if you don’t handle these stressors, your children and other beneficiaries may experience them if you cannot financially support them after you’re gone. Generational wealth can remove some, if not all, financial stressors that may impact your and your family’s well-being. If you have generational wealth, your descendants won’t have to worry about making ends meet; instead, they will have the funds to get a better education, start their businesses, and build their careers.
In addition, the wealth you build in your lifetime will likely compound in the future. With these funds, you can donate funds to charity, benefiting your local community and greater causes. This isn’t some high-lofted goal, either. Most people who accumulate wealth are more likely to have extra funds dedicated toward charity. According to a study by the Bank of America and the Indiana University Lily Family School of Philanthropy, 85.1% of affluent households donate to charit
y, which contrasts significantly with the 49.6% of the general population donating to charity.
Regardless of whether you’re using generational wealth to make a brighter future for your family or charity, it gives you the power of choice, which many dream of having.
Key Steps to Build Generational Wealth
Given the benefits of generational wealth, you would think everyone would pursue it as a financial goal. However, building generational wealth doesn’t happen overnight. It requires you to make a lifetime of the following decisions:
Create a Diversified Investment Portfolio
To build generational wealth, you should first examine your investment portfolio. Financial experts will offer differing advice on what your portfolio should look like for the best returns. Generally speaking, the best way to create a stable rise in returns is to make diverse investments. The more diverse your portfolio is, the more likely you can minimize negative impacts on your finances if one of your investments performs poorly. On the other hand, if you dedicate most of your portfolio toward a single investment, you are most likely to experience significant economic losses either in your lifetime or in the lifetime of future generations.
A well-diversified portfolio combines traditional investments like stocks and bonds with alternative assets like private equity and real estate. Stocks offer the potential for higher returns, while bonds provide stability and predictable income.
On the other hand, private equity involves investing in high-performing companies not listed on the public stock exchange. While it may require significant capital throughout the investing, investing in a company can make it more competitive and provide high returns for years. Real estate, particularly multi-family syndication, involves investing in property and renting it out to individuals. This kind of investment offers reliable cash flow tax advantages and will likely appreciate as the demand for housing rises with the population.
These investments create a robust portfolio to withstand market fluctuations while achieving sustainable growth.
Leverage Tax-Efficient Investment Accounts
Investment accounts also allow you to build generational wealth, as you can stow away your funds while minimizing tax liabilities. These accounts include:
- Individual Retirement Accounts (IRAs): Traditional and Roth IRAs offer tax-deferred or tax-free growth. You can also get a self-directed IRA (SDIRA) if you’d ever like to use your retirement funds for certain investments you’d like to make.
- 529 Plans: If you want to use generational wealth to help your family gain a better education through college or specific training, you can use a 529 plan provided by an educational institution or your state. According to the IRS, these plans are tax-deferred, and as long as the beneficiary uses the funds for their education, withdrawals aren’t considered taxable.
- Health Savings Accounts (HSAs): If you want to use generational wealth so your family doesn’t have to worry about unexpected medical expenses from a diagnosis or an emergency, HSAs may be a great option. They offer several tax benefits — tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses — making them an excellent way to save for healthcare costs while preserving wealth.
Beyond these accounts, you can also establish family trusts to protect your funds and ensure your family uses them correctly. Unlike other accounts, your beneficiaries don’t have to pay taxes on the account’s principal but rather the withdrawals from the account.
Invest in Assets With Long-Term Growth Potential
Anyone can be an investor. Not everyone can build generational wealth. The most significant difference between the two is investing in ventures that have sustained growth and will most likely appreciate over time or stay stable in future market conditions. While many of these investments may not have extreme spikes, they will rise, sustaining you and your family for years. Some examples include:
- Precious metals: Because precious metals like gold and silver are used in medical technology, aerospace technology, and the automotive, jewelry, and oil industries, they will always be in high demand. Therefore, investments in either will likely stay stable, regardless of inflation.
- Renewable energy: As demand for sustainable energy grows, investing in solar farms, wind energy, or green technologies can yield significant returns.
- Index funds and ETFs: Index funds are mutual funds that mirror the performance of specific indexes, such as the S&P 500. ETFs trade like stocks on exchanges. Both options reduce risk by spreading investments across various companies and sectors, making them cost-effective, reliable, and long-term wealth-building tools.
- Real estate and multifamily syndication: Multifamily syndication involves pooling resources with other investors to acquire residential properties, such as apartment complexes or homes, to rent out. Like any real estate investment, most multifamily syndication investments will appreciate over time. These assets generate steady rental income and offer tax benefits.
- Private equity: By investing in privately held businesses or projects, you can access high-growth opportunities unavailable in the public stock exchange. Since these companies aren’t publicly available for investment, there is often a high return rate, and they will likely appreciate in the long term.
By looking at the projected growth of potential investments, you can ensure that your generational wealth will continue to grow long after you’re actively making investments.
How Private Equity Builds Generational Wealth
Private equity can be one of the most powerful tools for creating generational wealth. Professional firms often manage these investments and use strategic approaches with your funds to improve operations, make the company more competitive, and use other tactics to improve the market value of the company. As these businesses thrive, your funds used to propel the company further will grow, which you can then use for profit-sharing opportunities. If your private equity investment performs well, you can exit the investment and use the funds for a different investment you believe will perform even better, thus growing your wealth even more.
Like any other investment portfolio, you can diversify your private equity investments to minimize risk. This tactic allows you to minimize any damages if a company doesn’t perform as well as predicted, which can be especially advantageous if this occurs after you’re gone.
How Multifamily Syndication Supports Wealth Creation
Unlike other real estate investment opportunities, multifamily syndication combines your funds with other investors to buy multiple residential properties. Without this collaboration, you wouldn’t have access to passive income, as residents provide regular rental payments while professional managers handle day-to-day operations.
In addition, multifamily syndication is also touted for its ability to leverage economies of scale. With a single real estate investment, you can only reap the benefits of a singular rental payment. Conversely, you can receive regular payments from multiple properties with multifamily syndication. Suppose a natural disaster damages the property or a resident doesn’t pay their rent on time. In either scenario, the negative impacts on your generational wealth won’t be as proportional if the same event occurred to a singular real estate investment.
Over time, the returns from this investment will compound, allowing your wealth to grow exponentially and support your legacy in the future.
Overcoming Challenges to Building Generational Wealth
While there are strategies to build generational wealth, there are many barriers for people that prevent them from protecting their legacy. These challenges include:
- Lack of education: According to the 2024 edition of the P-Fin Index, which measures the financial education of American adults, only 48% of Americans are financially literate. This lack of financial literacy prevents people from making wise investment choices that could benefit their families in future generations. While we need more systematic changes to address this issue, individuals can gain more education by attending workshops and consulting with advisors.
- Market volatility: Economic fluctuations may be a certainty in the future, but no one can predict how they will occur and what they’ll affect. Despite this, a diverse portfolio can minimize the damage a market fluctuation can have on your investment portfolio.
- Illiquidity of certain investments: Many investments, such as certain tax-efficient accounts or real estate investments, are challenging to convert to cash quickly. This can be difficult if you or your family experiences an emergency. To prepare for such an event, keep a stable mix of liquid and illiquid assets.
- Excessive taxation: High taxes on income and capital gains can vastly reduce the wealth passed down to future generations. The best way to minimize this impact is to use tax-advantaged accounts and consider investing in real estate to take advantage of tax benefits.
- Failure to play for generational transitions: It’s essential to have a strategy for your generational wealth to ensure the funds continue to grow once you can no longer manage them. The best way to make the smoothest transition is to plan out a will and trust with specific instructions on how you’d like your trusts and assets to be distributed and handled.
While building generational wealth primarily focuses on building your assets, it isn’t just that. It provides security for your family now and in the future. While you may have to think strategically to gain it, it is possible. If you want to invest more in multifamily syndication to obtain generational wealth, contact Viking Capital today! We’ll open doors you wouldn’t usually have, supporting your family and future.
FAQs About Generational Wealth
How Long Does It Take to Build Generational Wealth?
Building generational wealth is a long-term process that can take decades. The timeline depends on income, investment returns, financial discipline, and the strategies employed. Consistency and early planning significantly shorten the time required.
Can I Build Generational Wealth Without a High Income?
You can build generational wealth without a high income by prioritizing savings, investing wisely, and leveraging compounding growth. Starting small with low-cost investments or real estate opportunities can eventually lead to substantial wealth.
What Are Common Mistakes That Prevent Generational Wealth?
Common mistakes include failing to diversify investments, neglecting estate planning, over-leveraging, and poor financial literacy. Additionally, not preparing future generations to manage wealth effectively can lead to its erosion.
How Do Trusts Help Build Generational Wealth?
Trusts protect wealth by minimizing tax liabilities, ensuring legal transfer of assets, and shielding assets from creditors. They also allow specific conditions to guide how wealth is used by heirs, preserving its value for future generations.
Is Real Estate Better Than Stocks for Generational Wealth?
Both real estate and stocks have unique benefits for building generational wealth. Real estate offers stable, tangible assets with income potential, while stocks provide liquidity and compounding growth. A balanced approach often works best.
Are There Risks in Using Private Equity for Generational Wealth?
Private equity investments carry risks, such as illiquidity, high entry costs, and dependence on market conditions. However, they offer significant growth potential and tax advantages when carefully managed.
How Does Inflation Affect Generational Wealth?
Inflation erodes the purchasing power of wealth over time. Investing in real estate, stocks, and inflation-protected securities helps combat this effect and maintain long-term wealth value.
What Is the Best Way to Start Building Generational Wealth?
The best way to start is by setting clear financial goals, creating a budget, and beginning with investments like real estate, retirement accounts, or stocks. Consistency and education are key to building momentum.
Can Passive Income Help Build Generational Wealth?
Yes, passive income from sources like rental properties, dividends, or royalties provides a steady revenue stream you can reinvest to grow wealth and sustain it for future generations.
