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Building Generational Wealth: Three Ways to Invest for the Future

November 23, 2022

Our world abounds with change. The past three years have given families a new perspective on life and all that we hold dear. For many of us, this has resulted in closer connections with those we love and care for, as well as possible changes in our lifestyles, careers, and bucket lists. This renewed vigor for life, coupled with a changing economic landscape, has allowed many to reflect on the legacy they intend to leave for their subsequent generations. Many families are already building wealth by amassing savings or by growing a thriving business. Another key component is investing in a diversified portfolio that suits your family’s near-term needs and long-term goals.

Moreover, the goal of creating generational wealth requires an understanding of where and how to invest for your family’s future. Let’s focus on some of the most important areas that financial experts, like our team, recommend consumers consider within an investment strategy.

First, invest in a varied portfolio which may include vehicles like savings accounts, bonds, retirement accounts, individual stocks, and diversified funds - such as mutual funds and ETFs (exchange traded funds). Emergency funds are important to keep at arm’s length within an easily accessible high-yield savings account, but even at 2-4%, it may not keep up with inflation. 

Looking at investment options that historically offer more potential for long-term gains is a great way to begin building a diversified portfolio. Consider the S&P 500 - which is an index of 500 leading US companies whose stock trades on the public markets - which has generated close to a 10% average annual return since 1965. The stock market provides investment options in the form of individual stocks, which can be bought and sold by an advisor or client through brokerage accounts; mutual funds, which are professionally managed and are commonly available in brokerage account and retirement accounts; and ETFs which are also available in brokerage accounts but can be less expensive because they don't have a professional manager. For families who hold strong beliefs around certain assets, mutual funds and ETFs even allow you to invest in companies that align with your values and beliefs.

As a stand-alone strategy, investing in the market may be intimidating. That’s why our team recommends really understanding your risk tolerance and investing across many channels, as this strategy diversifies your exposure to different risks at different moments in time. It also creates a “risk stack” so you take risk in the right places - not much risk at all in emergency funds, but more in assets you will own for a long time, like retirement funds or real estate. If you’ve already purchased a home or hold additional rental properties, this could be a great long-term wealth-building solution for your family. With home values skyrocketing at 100 – 200% in value over the last two decades, home equity can create yet another source of wealth that may respond differently to the economy and market forces over time. Not every investment opportunity makes sense for every family, that’s why one of the best ways to approach diversified investing is to work with a financial advisor to design and manage your portfolio. The benefits of utilizing an advisor include a more personalized and knowledgeable approach to building a portfolio that syncs up with your family’s financial goals and different assets. As markets change, another key benefit is that an advisor can help rebalance your portfolio ensuring you’re always properly aligned with your long term goals. This is especially true now as the markets evolve in response to inflation and rising rates.  

Another way to ensure the future of following generations is to invest in their financial education. Starting early allows for practice of good financial behaviors such as saving, investing, and spending within their means. Creating games such as building a mini budget with rewards for sticking to it, setting savings goals to purchase something they want, or simulating an investment experience can all increase their understanding of good financial behaviors. Additionally, sharing both your positive and negative experiences with money can help your children understand the impact of saving, investing, and giving. Providing teachable moments around giving back will encourage well-rounded and financially fit children.

By incorporating healthy behaviors and values while also passing down smart investments, families can design a plan that provides for their family for many years. Adhering closely to your financial plan should allow you to tuck away savings at a comfortable and steady rate and allows a greater chance of hitting your long term goals. It’s also a smart way to prepare for a variety of expenses that are likely to arise in your family’s future. 

No matter what your assets are, the biggest takeaway is to have an intentional plan early in life and stay committed to investing throughout your lifetime. By setting a plan and sticking to it, families also create a powerful wealth-building machine that will fuel their family’s financial wellbeing for decades.

Generational wealth comes in two forms: physical financial assets and financial education and behaviors. As families set out to provide for future generations, both types come into play. Investing, building and protecting those assets and behaviors are essential to transferring financial wellness from one generation to the next.

Debra Brennan Tagg is a CERTIFIED FINANCIAL PLANNER™ Professional and the creator of the DBT360 Financial Plan, a proprietary program that helps her clients prioritize their goals, leverage their resources, and address their risks. She is the president of BFS Advisory Group and teaches the public and the financial services industry about the importance of values-based financial planning and investor education.