How to Build Generational Wealth

While living a life of luxury may be the dream for many people, there is a difference between simply being rich and being wealthy. The rich may have opulent homes and fancy cars, but the wealthy know how to invest the bulk of their money and spend as little as possible. If you want to create generational wealth, you must create a budget and spend far less money than you make.^{[1]XResearch source}

Part 1

Part 1 of 3:

Developing a Wealth Plan

1
Track your spending. Before you can start creating a wealth plan, you need to know where your money is going. Keep a log of all of your spending for at least a month so you'll have a good idea of how much you're spending.^{[2]XResearch source}
- The easiest way to do this is to download a financial app that you can connect to your bank accounts and credit cards. It will automatically populate your transactions, and may even categorize most of them automatically as well.
- You'll still need to go through and check those categories to make sure they're accurate.
- With an app, you'll have the benefit of charts and graphs that you can use to evaluate where your money is going.
2
Review recurring payments. You may have a number of regular subscriptions that you aren't really using. While you're trying to save as much money as possible, cancel anything that isn't giving you any benefit anymore.
- For example, if you have a subscription to magazines that you no longer read, you might want to go ahead and cancel them.
3
Distinguish wants from needs. If you want to create generational wealth, you need to spend as little as possible. This can be difficult and requires some sacrifice. Try to eliminate any spending on frivolous or unnecessary items.
- For example, suppose you get a cappuccino from the café down the street from your office every afternoon. After tracking your spending, you've discovered that you spend $150 a month on cappuccinos. By drinking the coffee at work and eliminating that expense, you've found an extra $150 you can save each month.
4
Maximize your income. You're not going to create generational wealth if you're living paycheck to paycheck. You can live a frugal, minimal lifestyle but if you're not bringing in a lot of income, your savings will remain minimal.^{[3]XResearch source}
- Depending on your current job, education, and experience, this might take longer. Think about your skills and the areas in which you have expertise, as well as the things you are passionate about.
- Consider starting your own business, even if it starts out as a side gig and you're still working a regular day job for awhile.
5
Set monthly savings goals. Once you've got your spending down to the absolute necessities, you should be able to come up with a portion of your income that you can save each month.^{[4]XResearch source}
- You might want to set several goals, especially if you've just started saving. Be patient with yourself, and remember that habits don't change over night.
- For example, you might ultimately want to get to the point that you're saving 50 percent of your monthly income. Start by setting a goal of 25 percent of your income the first month, then increase that goal to 30 percent the next month. Increase the percentage each month until you're saving 50 percent of your income.
6
Put your savings first. To create generational wealth, you must change your attitude towards saving. Typically, people will spend money over the course of a month and then save whatever's left. You need to save as much as possible, and live on what's left.
- By putting savings first, you signify that savings and investment are more important than your daily expenses. Ideally, you want to get to the point where you're saving more of your income than you're spending each month.
7
Create a budget. Your budget will determine how much it costs you to live each month, and how much money you're allocating for various needs, such as food and clothing. Set these numbers as low as possible, and aim to come in under budget each month.^{[5]XResearch source}
- Search for ways to save money and stay within your budget. For example, maybe you can get an old car repaired instead of buying a new car. You can buy used clothing at a thrift store instead of buying something new.
- Review your budget every month and compare it to your actual spending to see how you're doing. You may need to adjust it as your needs change, but make sure you're continuing to distinguish needs from wants.
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Part 2

Part 2 of 3:

Getting Out of Debt

1
Get a copy of your credit report. If you live in the United States, you are entitled to one free credit report per year. However, if you are trying to get out of debt, you want a copy of your credit report from all three major reporting bureaus, so you can compare them.^{[6]XResearch source}
- To get your free credit report, visit https://www.annualcreditreport.com/index.action. This is the only website authorized by the federal government, and is sponsored by all three bureaus. Once you've gotten one for free, you'll have to pay a small fee for the other two.
- Review your credit reports and contact the credit bureau that issued the report if you find any errors, so they can be corrected.
2
Make a list of all your debts. Going off of your credit reports, you can create a spreadsheet or list of all the debts you have. Include the name of the lender, the type of debt it is, the minimum monthly payment, and the interest rate.^{[7]XResearch source}
- As you're going through your debts, if you see anything small that you know you can take care of immediately, go ahead and do so. What you should be left with on your list are any debts that will take several months to pay off.
- Creating generational wealth is impossible if you are carrying a lot of debt. While you still should be saving, if you have a lot of debt you want to focus on paying that off before turning your attention to savings and investment.
3
Pay off high-interest debt first. Take your list of debts and organize it so that the highest interest rate is first. The higher the interest rate you're paying, the more money you're losing on that debt.^{[8]XResearch source}
- This may seem counter-intuitive at first, especially if you have a larger debt at a lower interest rate. However, it's important to get the higher-interest debts out of the way so that you aren't continuing to pay that interest.
- If you have a lot of debts, see what you can do to chip away at all of them, while still focusing on paying off those with the highest interest rates.
- Once you've paid off your high-interest debt, start consolidating your debt and getting rid of some of the credit cards you no longer need. Don't close the accounts, as this can negatively impact your credit rating. Instead, use only one credit card on a regular basis and try to pay the balance in full every month.
4
Negotiate lower interest rates. If you're in good standing with your lenders, you may be able to get them to lower your interest rate. It also may be possible to refinance some loans with another lender so you can get a lower interest rate.^{[9]XResearch source}
- Keep in mind most consumer credit card companies are reluctant to lower your interest rate. For this reason, it's generally best to pay the balance on any consumer credit cards in full every month, rather than carrying a balance from month to month.
Often, credit card debt is accumulated because of an unexpected emergency. If you build a savings account with three to six months' worth of living expenses, you will protect yourself against future credit card debt.^{[10]XResearch source}
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Part 3

Part 3 of 3:

Making Smart Investments

1
Work with a financial advisor. If you want to create generational wealth, you need to work with a professional who has the expertise to manage your investments appropriately. Look for someone with lower fees who has experience managing large portfolios and is focused on long-term growth.^{[11]XResearch source}
- Determine your investment objectives, including the return you want and the amount of risk you're willing to take to realize that return.
- Discuss your entire financial picture with your advisor, including your household budget, tax considerations, and the length of time you have to build your portfolio.
2
Buy real estate. The real estate market goes up and down, but real estate tends to appreciate over time. Typically, investing in real estate will produce greater returns than if you invested a similar amount of money in the stock market.^{[12]XResearch source}
- Buying real estate and renting it out can be a way to earn passive income that you can turn around and invest.
- With real estate you also build equity, which is essential if you want to create generational wealth.
3
Max out tax-preferred savings vehicles. With some retirement accounts, the government does not tax the money that you contribute over the course of the year, up to a certain maximum amount. Find out the maximum you can contribute to these accounts and hit that maximum every year.^{[13]XResearch source}
- For example, in the US you can contribute up to $5,500 a year to a Roth IRA if you're under 50 years old. Roth IRA contributions are after-tax dollars, but they are never taxed again. This can be a valuable savings vehicle, particularly if you are a younger investor who isn't making over $100,000 yet.
- Set your retirement funds to automatically withdraw from your paychecks, if possible, so the money is invested before it even comes into your hands. If you're contributing after-tax dollars to a retirement account, set up automatic withdrawals from your checking account the same day as your check is deposited.
4
Be willing to take on some risk. If you want to create a sizable portfolio of investments that will provide income for several generations, you can't limit yourself to conservative investments.^{[14]XResearch source}
- The greater the risk, the greater the potential for large returns. However, there also is the possibility that you will end up with significant losses.
- The amount of risk you should take on depends on your age and your general investment style. If you're a younger investor and plan to invest for several decades before retiring, you can afford to take on more risk. However, if you're older and nearing retirement, you'll want to take on less risk.
5
Diversify your portfolio. If you want your portfolio to grow, you need to take on several different classes and styles of investment. That way, if one part of the market is underperforming, your other investments may make up for that loss.^{[15]XResearch source}
- Good diversification will remove the timing element from your investment strategy, so that your assets are not subject to the whims of the market.
- Work with your financial advisor to build a strong diversification strategy, then review your portfolio once a year and adjust your assets as necessary to maintain that diversification. For example, if an investment that was 10 percent of your portfolio outperformed, and now makes up 15 percent of your portfolio, you would want to take that 5 percent and move it to an underperforming investment to maintain your balance.
6
Adjust your withdrawal rate. If you want your portfolio to last forever (or at least for several generations), you can't withdraw too much. Generally, you should withdraw at least 1 percent less than your rate of return minus the annual rate of inflation.^{[16]XResearch source}
- For example, you wouldn't want to withdraw more than 3.5 percent of your portfolio each year if your rate of return was 6 percent and annual inflation was 2.5 percent.
- Even a sizable portfolio won't last if you're taking out more money each year than it is earning. To create generational wealth, you need to keep your withdrawals as low as possible in the years after you retire.
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