How to build generational wealth

In today's world, achieving financial security and prosperity has become a top priority for families. The concept of generational wealth has gained significant traction in recent years, but what exactly does it mean? And more importantly, how can you start building this legacy for your family?

What is generational wealth, and why is it important?

Generational wealth means passing down assets and resources to future family members for financial stability and security. It includes things such as cash, property, investments, businesses and other valuable possessions that grow over time.

But why is it important? Consider the following example:

Both John and Jacob have a university degree, are employed and are earning a good salary. Both are paying general monthly expenses: a car, groceries, school fees for their children etc.

The difference is that John also has a substantial home loan that he pays each month, leaving him with very little money to save or invest. Should John face a financial emergency, he’ll probably need to make debt, for which he will have to pay interest. This would make it even more difficult for him to invest his money and grow financially.

Jacob, however, inherited a house from his grandfather when he was 27 years old, as well as R100 000 from an investment fund that his grandparents started for him when he was born. Jacob lives in the house with his family and doesn’t have to pay a home loan. This leaves him with enough money to save or invest each month. He has also kept his investment fund, which he has access to in case of a financial emergency. This means that Jacob is free to build a good financial foundation for his own children one day.

Generational wealth can have a powerful impact on future generations, both financially and emotionally. It is also important because it can do the following:

• Provide long-term financial security for your family  
• Open opportunities for your children and beyond  
• Equip your children for the future  
• Promote economic growth  
• Open doors for your children to pursue their dreams  
• Teach your children financial responsibility

Building a strong financial foundation

Good money management is important to building generational wealth. It involves educating yourself and your family members about personal finance concepts, such as budgeting, saving and investment strategies. By sharing your knowledge with your kids and grandkids, you can help them develop good financial habits early on and make smart decisions about their money as they grow up.

One of the most common ways to introduce kids to the idea of responsible money management is to give them an allowance. This teaches children about budgeting, saving, impulse control and delayed gratification, all important factors tied to wise money spending.

Planning for your financial future

To build wealth that lasts for generations, you need a solid financial plan. This means figuring out what your family wants to achieve in the long run—buying a house, paying for university, starting a business or retiring comfortably—and creating a roadmap to get there:

• Saving: Create a budget to control your spending so that you have guaranteed funds available to save. Savings can build up to a substantial amount that can be invested in assets (such as property, stocks and bonds) that can increase in value over time and provide (passive) income to the family.  
• Emergency fund: It’s almost impossible to build wealth when you’re constantly digging yourself out from the last emergency and stressed about the next one. By creating an emergency fund, you can help break the cycle. Not only will you be covered during a difficult time, but an emergency fund also offers peace of mind and gives you a buffer, so you don’t have to take on more debt (and spend more money on paying unnecessary interest).  
• Multiple streams of income: When it comes to building your financial portfolio, creating multiple streams of income is a smart way to go. You could use your active income (such as a job or side hustle) to pay for daily expenses while your passive income (from rental properties, investments or other projects that don’t take your time or effort to grow) could be used to build up your savings or investments.  
• Debt and financial pitfalls: Living within your means is a healthy way to save and build your financial foundation, even though not all debt is bad. By paying off debt as quickly as possible, you can avoid high-interest payments and free up resources for investing in assets with higher potential returns. This means you can build your wealth faster and achieve your financial goals sooner.  
• Life insurance: Not only is life insurance a great tax vehicle for your income; it also protects your family in the event of your untimely passing. Without your income, your children might be forced into less-than-ideal financial circumstances. However, if you make the effort to invest in life insurance, it will give them some financial peace of mind during an already difficult time.

Why investments matter

Investing in the stock market is a smart way to grow your wealth without much effort. It also protects your money from losing value due to rising prices. Spreading your money across different types of investments minimises risks and opens doors for long-term financial success. Think of it as planting seeds for your future wealth.

Strategic estate planning

Estate planning is crucial for protecting generational wealth. By having an estate plan, you’re ensuring that your money and belongings go where you want them to after you’ve passed on. Without a plan, things could get messy: your assets could be affected by hefty taxes; there could be legal fights, and there may be delays in distributing your inheritance. With a solid estate plan, you can minimise the hassle and ensure that your wishes are met.

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_{Disclaimer: This article is solely intended for information. It does not constitute financial, tax or investment advice or recommendation. Please speak to a financial advisor or registered financial professional before making any financial decision(s).}

_{Standard Bank, its subsidiaries or holding company, or any subsidiary of the holding company and all of its subsidiaries make no warranties or representations (implied or otherwise) as to the accuracy, completeness or fitness for purpose of the information provided in this article or that it is free from errors or omissions.}