As a parent, it’s natural that you’ll always want what’s best for your children. Their happiness, success and financial security will be as important to you as your own and, with this in mind, you may well have thought about how you might start planning and saving for your children’s futures.
Building prosperity for your children – and their children – is known as generational wealth. The objective is to give future generations of your family the best possible chance of financial security. In this article, we’re posing the question of how to build generational wealth, why it’s important, and what it involves.
What is generational wealth?
When taking their own financial planning advice, more and more people are thinking ahead to how they may provide for their children’s futures. This is known as ‘generational wealth’. And it’s not just for the super-rich.
More and more families are finding it possible to make provisions for their children simply by planning ahead early enough, and by taking the right advice.
Generational wealth is not just about money. It can also involve property, businesses, stocks and shares and valuable commodities, such as gold.
When you look at how to build generational wealth, it’s not just about accumulating assets. It’s more to do with managing finances in a responsible and careful way that promotes growth so that the wealth endures over time.
Why is it beneficial to build generational wealth for your family?
Generational wealth provides stability and security. It protects family members from financial calamities, providing a buffer of support during challenging times. It also provides a secure foundation from which the family member can thrive.
In addition, generational wealth can provide opportunities for success. With wealth in place, future generations can enjoy access to higher education and specialist training, start businesses, or follow creative passions without any financial worries. They may also get a leg up onto the property ladder, providing future security.
How to build generational wealth? 5 practical strategies explained.
To build generational wealth, it is necessary to have a tailored plan in place. Personalised financial advice is vital, regardless of the strategies you pursue.
With this in mind, let’s take a look at some of the most common ways to build generational wealth.
1. Optimise savings
The most straightforward strategy for building generational wealth is to put money aside in a suitable savings vehicle.
Maximising tax-efficient accounts such as ISAs (Individual Savings Accounts) can be a good foundation strategy, as these accounts allow you to save or invest a set amount each year, without having to pay tax on the interest. It is important to ensure you maximise your contributions between you and your spouse annually.
High interest savings accounts and bonds are also an option for cash savings. These can sometimes offer better returns than regular savings accounts.
A child trust account or junior ISA is another tax-efficient savings vehicle designed to help parents and guardians save for their child’s future. These are available to children aged under 18 who are UK residents. There is a choice between a cash or stocks and shares junior ISA.
Both may be paid into by parents, guardians and other family members or friends, and have an upper annual contribution limit. They are managed by parents or guardians until the child turns 16, at which point the child can take over management, but cannot withdraw funds until they are 18.
Finally, you may wish to consider an automated savings plan. This involves setting up automatic transfers into a savings account, ensuring a portion of your income is saved before you have a chance to spend it.
2. Invest in property
Investing in a buy-to-let property can provide a steady income stream and capital growth over time. Of course, the returns will depend on the location and rental yield, and there are costs to factor in, such as property management and licensing fees, as well as Income Tax on profits exceeding the appropriate personal allowance.
It is therefore essential to weigh up the pros and cons of this strategy to ensure the returns are worthwhile.
Property development is another option. This could involve buying properties at attractive prices and renovating them to sell at a profit.
Do bear in mind that again there will be tax implications. Capital Gains Tax (CGT) for example will be chargeable in some cases on the gain in value exceeding the current CGT tax-free allowance, although there are often ways to mitigate the liability.
3. Diversify investment portfolios
If you are going down the route of investment, diversifying your portfolio helps to spread the risk across various sectors and geographical regions. It is vital to engage with an investment management specialist who will tailor your investment strategy to your risk tolerance and long term objectives.
You may also wish to look at mutual funds and ETFs (exchange-traded funds). These are pooled investments which offer diversification and can be a cost effective way to realise the benefits of a broader market or specific sectors.
Alternative investments such as private equity, hedge funds and venture capital provide another option. Whilst they come with added risk, they can sometimes offer higher returns. Again, professional and fully tailored advice is vital when making any sort of decision around investments.
4. Business development and entrepreneurship
Starting and growing a family business can be an effective way to build generational wealth. If you are starting from scratch, look at industries with strong growth potential, and be sure to make the most of your specific expertise and network.
If you already own a business, work on developing a clear succession plan. This will ensure the business can be passed down efficiently, and will continue to thrive under the next generation.
Another option is to invest in a start-up business. As an angel investor or using venture capital funds, you could support a new business and reap the rewards of their success.
5. Life insurance and estate planning
Life insurance is essential to protect your family’s financial future. Look at policies that cover your income and debts and that will ensure your family can maintain their standard of living should you die unexpectedly.
Estate and Inheritance Tax planning is another crucial strategy when it comes to how to build generational wealth.
Inheritance Tax (IHT) can considerably reduce the wealth that’s passed on to your family. Effective planning is vital, such as gifting assets during your lifetime, and setting up trusts. Never omit to take specialist advice in this area, because the value of an estate planning expert’s knowledge can never be underestimated.
How to build generational wealth – final tips
Start early – the earlier you begin your generational wealth building strategy, the more time your investments will have to grow.
Make regular contributions – if you are saving, consider that even small, regular contributions can accumulate considerably over 18 years.
Educate your children – use your generational wealth building strategies as a teaching tool to educate your children about saving, investing and financial responsibility as they grow older.
Balance risk and reward – make sure your strategy will deliver the goals you are seeking to achieve, and that it is aligned with your personal attitude to risk.
Regularly review your strategy – regularly review the progress of your generational wealth building strategy, and make adjustments if necessary to ensure it stays in line with your objectives.
By following the strategies set out above, you can create a robust plan for building and preserving generational wealth. This will help to provide financial security and opportunities for your family into the future.
Looking for guidance on how to build generational wealth? Talk to the specialist financial planners at PMW.
At Partridge Muir & Warren, we have been supporting clients for over 50 years courtesy of tailored, independent financial planning.
Through our specialist financial planning for families, we can help you create a generational wealth building strategy, and then work with you for the long term to make sure you stay on track to achieve your goals for your family.
Why not get in touch with our friendly team and arrange your no-obligation complimentary consultation? We look forward to being of assistance.