How to create generational wealth

Achieving financial freedom, let alone building generational wealth, has never been easy.

It may be more difficult to do today than in previous years. For instance, the top 10% of U.S. earners in 2023 owned nearly 70% of the wealth and the bottom 50% owned only 2.5%.¹

But with planning and persistence, building generational wealth is most certainly possible.

Here are a number of actionable expert tips and strategies to follow, whether you’re looking for information on how to build generational wealth from scratch, or want to jumpstart you and your family’s journey to financial stability for generations to come.

First, we will cover some foundational differences between generational wealth, financial stability, and financial security.

Everyone’s concept of generational wealth is different. But at its most basic level, it simply refers to the ability to pass assets along from one generation of a family to the next.

When most people think of building generational wealth, they often associate it with some degree of financial stability, or even financial security.

• Financial stability refers to the ability to pay off expenses regularly without dipping into savings.
• Financial security refers to having enough funds to not only cover expenses, but also pay debts, and retire comfortably without fear of running out of money.

When most people think of building generational wealth, what they’re referring to is the ability to do all this and pass some type of sizable inheritance along to children or grandchildren.

The strategies listed below are effective ways to build lasting, sizable generational wealth and multi-generational financial security, if implemented carefully and strategically

It’s easy to hear statistics and listen to pundits who decry the ability to build generational wealth.

Avoid falling prey to this trap.

For most people, a privileged few aside, building lasting generational wealth is extremely difficult.

But it’s also an extremely worthy goal. It’s not about hoarding resources. (In fact, at Raisin, we encourage giving back as you are able, which is why we support charitable banking institutions). Rather, it’s about being able to provide for yourself and your family members.

But before you can start building generational wealth, you need to believe that it’s possible.

Many of the concepts herein assume that you have some degree of financial literacy. Many people do not.

It’s okay if you don’t know the difference between diversification and divestment or building generational wealth and building a nest egg.

Commit yourself to building financial literacy by learning to keep a budget, talking to a financial advisor, reading personal finance books or listening to financial podcasts, and checking our financial education center often.

You should always be aware of risks involved in making any financial decision so you can manage the risk to the best of your ability. You should also avoid taking risks just because you think they will have a big payoff.

On the other hand, it’s difficult if not impossible to build generational wealth without incurring some level of risk, whether that looks like starting a business or investing in shares of another business, or the stock market.

Everyone’s risk tolerance is different. While you may never be comfortable with, as an example, trading options, you might find investing in a high-yield savings account or an index fund more appropriate.

If you’re not quite sure how comfortable with risk you are, or you want to understand the risks vs. the return on investment (or ROI) of particular investments, you may wish to speak to a financial planner to expand your financial horizons.

The average salary in the U.S. at the end of 2023 was $59,000.² That may not be enough to build generational wealth.

Take stock of your current income level and if needed, talk to a financial advisor if it’s realistic to expect to build generational wealth with it.

If not, consider a career change, which may necessitate going back to school, networking, up-skilling, or more than likely, a combination of several different actions.

For most people looking to build generational wealth, starting a business may be a more effective strategy. And even then, it’s difficult to “get rich quickly."

That said, according to the Federal Reserve in its 2022 Survey of Consumer Finances, while the median net worth for individuals in the U.S. was $155,700 for employees, it was $446,370 for those who were self-employed³.

Most families who have successfully built and passed on generational wealth don’t just have a job or own a business; they have multiple income streams, including passive income.

Passive income may include:

• Investing in high-dividend stocks
• Investing in a high-yield savings account or CDs
• Taking on a “side hustle” (or second job)
• Renting out a parking space, car, or room in your home
• If you are able, purchasing and renting out an income-generating property

Finding a way to generate passive income, or money earned with little effort, can be especially effective.

While taking out a life insurance policy doesn’t technically qualify as “building” generational wealth, it can be an effective way to pass on money to future generations for a relatively low monthly cost.

When you take a life insurance policy out against yourself, whoever you name as the beneficiaries only receive the benefit upon your death according to the terms of the policy.

Buying life insurance may not be an effective strategy to build generational wealth by itself, especially since as the insured, or person taking out the policy against yourself, you don’t reap the benefits. But when combined with other investments and wealth-building activities, it can be a smart and relatively safe way to pass money on to loved ones.

Life insurance generally comes in two main types, term insurance, and permanent (whole) insurance.⁴

• Term life insurance offers coverage for a specific period of time (i.e. 5, 10, or 20 years), after which point you can choose to renew the policy or let it lapse. Premiums are usually lower but may increase with age. The death benefit is only received by beneficiaries if you pass during the policy term, not after. It’s better suited for temporary needs, but can sometimes be converted to whole insurance.
• Permanent, or whole life insurance provides lifelong coverage so long as you pay the premiums. The premiums are higher than term life and the amount you pay is fixed, but part of the premium builds cash value. The payout is guaranteed regardless of whether the insured passes (in or outside of the coverage term). Since permanent insurance policies build cash value that can be borrowed against, it can act as a savings vehicle with tax-deferred growth.

In the context of building generational wealth and passing funds to future generations, permanent insurance is more likely the appropriate type of coverage to choose.

If you don’t own your own home, thinking about how to become a homeowner might be daunting. However, it may be a financially wise decision. If you’re already a homeowner, investing in a rental property could be the next step.

Keep in mind that you shouldn’t think of buying a home as a risk-free decision. On the contrary. Home values go up and down based on a variety of factors, including the supply and demand of the local market, the health of the economy, and more. What’s more, a mortgage is just a type of loan, so there’s always a risk of defaulting (foreclosing). There are two main benefits of buying a home versus renting for those who can afford it. The first is equity. The second is the opportunity cost of renting your whole life.

• Equity: There’s always a risk that you could sell your house and it could be less than it was worth when you bought it, meaning you could have negative equity, or lose money. But statistically and historically speaking, the overwhelming majority of negative equity mortgages has been the exception rather than the rule. For reference, as of the end of 2023, negative equity mortgages comprised just 3.1% of all mortgages.⁵
• More Stable Payments vs. Rent: While if you have a variable rate mortgage, your payment could change, if you choose a fixed rate mortgage, your payment should remain consistent for the life of your loan, which for most homeowners is 30 years. By contrast, most landlords increase their rent at least once every few years if not once a year. This can make budgeting, saving, and therefore building generational wealth, very difficult.

It's for these two reasons that homeowners, on average, have a much higher net worth than renters, and why we include it along with our other strategies to build generational wealth.

In order to achieve generational wealth, you must find a way to grow your money in a way that aligns with your risk tolerance. Keep in mind, however, that in most cases, the less risk, the lower the return. (This is why assessing your risk tolerance and discussing how much risk is smart to take given your financial situation is so important. You don’t want to lose your money. But letting it all sit in a standard checking account or worse, not saving at all, does next to nothing to help you make money on your existing money).

There are various ways to grow your money, many of which have less risk than investing in the stock market.

But historically, the average return on investment for the S&P 500 stock market index has hovered around 10%, or 7% adjusted for inflation.

Here are a few examples of how investing in the stock market could help you build generational wealth assuming a rate of return of 10% and annual compounding:

• You invest $10,000 in the stock market and hold it for 30 years. By the end of the 30 years, you’d have nearly $175,000 thanks to compound interest.
• You invest an initial sum of $10,000 and add just $100 to that every month. By the end of 30 years, you’d have over $370,000.
• You invest an initial amount of $25,000 and are able to further invest $300 more each month for 30 years. By the end of the 30 years you’d have over $1,000,000.

Remember, if your risk tolerance is low, investing in the stock market may not be the best decision for you. Instead, you might prefer to invest in a CD with an APY of 5%, for instance.

Before you build generational wealth, it’s important to become financially secure, and before becoming financially secure, it’s important to attain financial stability, which involves paying off debts and establishing an emergency fund.

A high-yield savings account on the Raisin platform in the perfect place to set aside an emergency fund that grows without any action required on your part, but that remains accessible should you need to draw against it for any reason.

Once you’ve done that, it’s time to consider contributing to a 401(k) and/or Roth IRA and exploring other investment vehicles, such as CDs.

Building generational wealth can be a gift to your loved ones for years to come. Head to our CD accounts page to view your options.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sources:

¹ https://www.statista.com/statistics/203961/wealth-distribution-for-the-us/

² https://www.bls.gov/opub/ted/2024/median-weekly-earnings-of-full-time-workers-were-1145-in-the-fourth-quarter-of-2023.html

³ https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/#series:Assets;demographic:occat1;population:1,2,3,4;units:median

⁴ https://www.dfs.ny.gov/consumers/life_insurance/types_of_policies

⁵ https://www.fhfa.gov/blog/statistics/homeowners-equity-remains-high