According to the Federal Reserve System, the total amount of wealth transferred from one generation to the next amounted to approximately $350 billion per year. However, only around two million American households — less than 2% of all households in the country — receive any type of intergenerational wealth or inheritance each year.
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Whether it’s cash or an asset like a business or real estate, building generational wealth plays a key role in securing any family’s financial future. But so many people don’t know where to start, or what to invest in, to set their family on this path. If you’re trying to figure out how to build generational wealth for your loved ones, here’s some advice from the experts on how to do it.
Understanding Generational Wealth
“Most people think of generational wealth as the Rockefellers, Kennedys, and having trust funds being passed down for multiple generations, but generational wealth has many forms,” said Jen Reid, financial planner and founder of BASE Planning.
Generational wealth can be something simple — like getting help with your college education so you don’t graduate with student loans. Or it can be something with even greater, reaching effects like a large inheritance that makes it where you never have to work again.
The first step is to determine what generational wealth means to you and why you want to build it. After that, you can start focusing on what to invest in — like these seven investments.
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1. Get a Life Insurance Policy — and Quickly
A life insurance policy is essentially a contract between the policyholder — you — and an insurance company. When you take out a life insurance policy, you’ll typically need to make regular payments for the duration of the contract.
In return, the insurer agrees to pay out a specific sum of money to any beneficiaries listed on that policy. This is called a death benefit. Depending on the policy, your beneficiaries may receive this payout upon your death or in the event of a terminal illness.
“You are your biggest asset,” said Reid, “and protecting the ability to produce income while you are alive will be the most effective way to build generational wealth and support your loved ones. Simple term life insurance that gives you a high death benefit with [a] low monthly cost is the best way to go, and what I recommend to my clients.”
Life insurance policies come in many forms, such as term or whole life policies, and coverage amounts. It’s important to review your options carefully so you can choose the one that best suits your needs and plans.
The CEO and founder of Masutes Group and mySTAYINN, Pavinder Singh (or Pav Masutes), also recommends having a life insurance policy — even if you’re a successful business owner. “No matter how successful any business is, many families have almost all of their wealth taken from them in the case of an unexpected passing without a good life insurance policy,” Singh said. “It gives security to your children while also preventing any investments you have from going down the drain.”
2. Secure Investments That Pay Out in Dividends
“Publicly traded energy-focused limited partnerships, publicly traded real estate investment trusts (REITs), and blue chip stocks with a clear focus on dividend payments are the top three smartest investments one should make to create generational wealth because they pay a high amount of current income,” said Christopher Manske, founder and president of Manske Wealth Management.
Investing in stocks and other assets that yield dividends can help you generate income — not only for yourself but for your family. You can also reinvest those dividends to continue building your portfolio and adding to your income.
“Whatever amount your portfolio is paying out each month is the extra money your heirs can enjoy for the rest of their lives,” added Manske. “If they choose to spend only half of that income, the other half can remain in the portfolio and continue to grow the holdings which increases the income generated.”
But remember, not all companies in the stock market are created equal. Young Pham, co-founder and investment analyst associated with BizReport, suggests, “If you are looking to build generational wealth, it is advisable to pick companies that not only offer the potential for capital appreciation but those that offer regular cash flow each year.” Focus on companies with a history of paying dividends to their shareholders.
3. Get Into Value Investing
Value investing is another investment strategy that works by identifying stocks that are currently undervalued. “Value investing is a time-tested strategy for building long-term generational wealth,” said Pham. “The idea is based on trying to find robust undervalued companies that have the potential to blow up in the future.”
With value investing, it can be tricky to find a worthwhile investment. Be prepared to do thorough research before buying any discounted stocks. Weigh the company’s assets and equity and compare that to the price of its stock. If the asset’s value is higher than the stock price, then the stock could be undervalued.
4. Invest in Real Estate
The cost of real estate has gone up significantly over the years, which is why it might be wise to keep an eye on property values in your area and, if the timing is right, secure a few. You can keep some of these for yourself as primary or secondary residences, but you can also invest in rental properties.
“Owning property can be a surefire way to build wealth,” said Nick Ganesh, marketing manager at Endeavor Metals. “It tends to appreciate over time. Plus, if it’s a rental, you’ve got some nice cash flow!”
Say, for example, you purchase a rental property and rent it out to someone. You could earn some extra income on the side while building equity in the property.
“The good thing about rental property is that it can literally provide you with a steady income stream that you can use to invest in more rental property,” added Pham. “Besides, you do not have to limit yourself to residential property alone. You can also consider commercial property as well.”
5. Start a Business and Leave It to Your Children
Creating a business that you can pass down to your descendants is another great way to build intergenerational wealth. “Around 30% of businesses are passed down to the next generation below,” said Singh. “This may not sound like that much, but when compared to other risky investments, this is a promising proportion.”
By building a successful business for the next generation, you’re providing them with more job security. But you’re also giving them the opportunity to expand and grow in their own way. This can also lead to more wealth for the next generation and the next.
6. Invest in Gold
There’s a reason why so many financial experts suggest investing in gold. It tends to be more stable than some other assets. Plus, it’s a good way to diversify your portfolio — and balance out your investments during times of economic uncertainty.
“It’s like a security blanket during economic shake-ups,” said Ganesh. “When economies wobble and currencies falter, gold tends to hold its ground or even gain in value.”
7. Invest in an Experienced Estate Planning Attorney
You might not realize it yet, but having an experienced estate planning attorney can help you secure your funds or assets when you pass them down to your family. “By working with a knowledgeable estate planner, you will be able to hedge against probate and any additional attacks on the generational wealth that you plan to build,” said Reid. “It will also ensure that your exact wishes with the assets you create will have a plan after your death.”
While you’re at it, consider creating a family council to help secure your family’s financial security. “If your family is serious about creating intergenerational wealth, establishing some kind of family council to discuss and monitor family spending is important,” said Singh. “Not only will this educate your family members about your financial goals, but it will also stamp out any unnecessary spending or risk exposure.”
Securing Generational Wealth: Stick to the Basics
Building intergenerational wealth is a long-term game, one that can involve tangible or intangible assets and other investments. But it can seem complicated at the onset. That’s why it’s so important to stick to the basics.
Choose investments that make sense to you and your family — and your risk tolerance. Along with this, assess your portfolio and reinvest where you can. Doing this can help ensure you have something to pass along to the next generation.
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This article originally appeared on GOBankingRates.com: I’m a Financial Planning Expert: Here Are 7 Investments You Should Make To Secure Generational Wealth
