Generational Wealth

It is estimated that 70% of wealthy families lose their wealth by the 2^nd generation, with 90% losing this by the time the 3^rd generation is reached. A deeper look into why this is the case provides insight into the lack of financial knowledge that is being passed down to future generations

What is generational wealth?

Generational wealth includes any financial asset that is passed down from one generation to the next. This includes more “obvious” assets of property and money, but also covers anything else of monetary value, such as expensive artwork.

 

Why is generational wealth useful?

In a nutshell, wealth enables inheritors to make more choices with fewer restrictions as there is less pressure on financial responsibilities. Instead of living from payslip to payslip, they have the freedom to plan properly for their future without these external pressures.

 

How can generational wealth be created?

• Investment in the stock market– if excess money is invested in this way, wealth can be built passively with little effort needed on your behalf
• Investment in real estate– while the housing market is still liable to fluctuations, it is less volatile than the stock market
• Create a family business to pass down through generations
• Spend on life insurance– this will act as a safety net to ensure your family are looked after in the event of death

 

How can generational wealth be passed down?

• Write a will- ensure that all of your financial assets are listed with instructions for each one. This prevents the state from being in control of decisions regarding your assets
• Set up a trust to transfer assets to beneficiaries- this can help to avoid large amounts of inheritance tax, ensuring that your assets are passed on more efficiently
• Name beneficiaries for your accounts- attaching a beneficiary to each account will smoothen the process of transferring funds to your family in the event of death

 

Why is generational wealth lost?

Generational wealth is often lost because of a lack of knowledge being passed on from generation to generation about financial matters and the value of money. The generation earning wealth tends to be hardworking, saving well to achieve financial goals. The second generation, whilst living a more financially comfortable life, tend to witness their parents’ struggles growing up, and so have a level of understanding of hard work and sacrifice. The third generation never gets to witness the financial struggle of the first generation, and so may remain ignorant of the value of money, as it is always seen as something that is simply there, rather than earned.

In this day and age, discussing money seems almost “taboo”. Parents are reluctant to discuss their finances with their children, refusing to mention their income or the cost of their expenditures, whether through shame or modesty. This puts their children at an immediate disadvantage; how can they be expected to understand the value of money if they are never taught it?

This poor communication is combined with a lack of shared decision making, wherein wealthy families do not allow the youngest generation input in financial matters. If this generation grows up in an environment where they have never made these decisions, they will be incapable of making them when they take over the family estate in the future.

This is a principle that can also be applied to families that don’t possess generational wealth. Financial education is not just for those with lots of money- it is important for everyone, because we all have to deal with financial matters.