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How to Build Generational Wealth

by Tami McDonald | May 1, 2024 | Financial Planning

Women’s history month provided an important opportunity to discuss how far women have come in the management of their family finances – and how far they have left to go. Women have always contributed to household finances but only gained the legal right to own bank accounts in 1862. Many women couldn’t take full advantage of this right until they became protected from financial discrimination in 1974. Fifty years later, households led by women still only control 28% of our country’s wealth. It is time for that fact to change.

With hard work, careful planning, and prudent financial decisions, women can take full advantage of opportunities to grow their wealth and pass it down to future generations. However, it is not just women that can benefit from building generational wealth. Anyone can create an easier life for their children by following these steps.

1. Maximize Your Income

Generational wealth starts with maximizing the income you earn today. After all, the more you earn, the more you can save.

You don’t need to work eighty hours a week or even accept a career you hate just for a healthy paycheck. Instead, maximizing your income could mean negotiating a higher salary at your current employer, searching for a better paying job in your field, or even starting your own business.

2. Control Your Spending

Making more money is an important first step in building generational wealth, but that hard work is negated if you spend everything you earn. Instead, you need to keep track of where your money is spent and actively seek ways to reduce your spending.

You may think that controlling your spending only refers to activities like cancelling subscriptions you don’t need, avoiding restaurants in favor of home cooking, and wearing last year’s clothes rather than buying new ones. However, minimizing your tax liability and interest payments are also important considerations.

Minimize Tax Liability

Money paid in unnecessary taxes is money you can’t use to grow your wealth. For this reason, you need to take advantage of deductions and tax-advantaged accounts to reduce your tax liability.

Some examples of accounts you can use to reduce your taxes now or in the future are Individual Retirement Accounts [IRAs], 401(k)s, and Health Savings Accounts [HSAs]. These accounts allow you to save for the future while minimizing money lost to taxes.

Avoid High Interest Payments

Like taxes, high interest payments can cripple your monthly budget and prevent you from saving for future generations. There are certainly cases where debt is a positive factor in your financial plan, but you should only use high-interest debt – such as credit cards and personal loans – when all other options have been exhausted. By avoiding high interest payments, unnecessary taxes, and rogue spending, you can save more of your income and start building a nest egg to pass to future generations.

3. Prepare for Emergencies

A financial emergency can deplete your savings and set you back years in your journey to generational wealth. Fortunately, there are well-established ways to avoid this outcome.

Work with an experienced financial advisor to evaluate your potential liability and insurance coverage. An advisor can help you ensure you have sufficient insurance to protect you from costly medical issues, damage to your home, car problems, and other expenses that arise unexpectedly.

In addition to insurance, you need an emergency fund to cover your share of unexpected expenses. The money you set aside for emergencies keeps you from dipping into your savings to cover your insurance deductibles and personal expenses.

4. Take Advantage of Compound Returns

It is no secret that investing your savings can help your money grow more quickly. In fact, compound returns are considered one of the key tenants to building and keeping generational wealth.

Compound returns are the income you earn from past investment returns. The earlier you start investing, the more time you have to take advantage of these returns and the growth they provide in your portfolio. For this reason, it is important to start saving as early as possible.

5. Create an Estate Plan

Once you have started building wealth, you must take the necessary steps to ensure that it passes to future generations according to your wishes. Your estate plan is the tool you use to enforce these wishes.

The part of an estate plan that most people are familiar with is a last will and testament – the document that relays your wishes for splitting your assets. This document is important but there are others that you will need as part of a comprehensive estate plan.

An experienced financial advisor can help you determine what estate planning tools are best suited to your situation such as a financial power of attorney, medical power of attorney, trusts, and life insurance. These tools are crucial to protecting the wealth you have accumulated and minimizing estate taxes.

Build Generational Wealth with Brookstone Wealth Management

At Brookstone Wealth Management, our experienced advisors can help you with every step of building generational wealth. We start by building your Financial Fingerprint™ – a comprehensive wealth management plan that considers your unique goals and outlines the steps you need to take to achieve them.

Your financial plan is supported by our team of tax, legal, and investment professionals that can guide you through every step of generating wealth and passing it to future generations. We take a unique approach to financial planning that focuses on coaching, teaching, and mentoring to help you turn your financial goals into a reality.