Generational Wealth: How to Build It and Pass It On

When most people think of generational wealth, they picture enormous fortunes or trust funds—millions stashed away for future heirs. But here’s the truth: you might already be laying the groundwork without realizing it.

This guide will show you how to build, grow, and protect generational wealth so you can transform your family’s future.

What Is Generational Wealth?

Generational wealth is anything of value—money, property, or other assets—that you pass down to your children or grandchildren. It could be as simple as your home, a savings account, or the stocks you've invested in. Even family heirlooms like valuable jewelry can count.

Think of generational wealth as a financial head start. It’s not just about leaving behind money but creating opportunities. When parents pass down resources, their children can use them to build better lives by buying a home, starting a business, or paying for an education. Over time, this chain of support strengthens, giving each new generation a better foundation to succeed.

How wealth transfers between generations

Families pass down wealth in various ways. Some are direct, like an inheritance outlined in a will. Others are less obvious, like grandparents covering costs for braces or music lessons.

Here are the most common ways wealth is transferred:

• Savings accounts and cash
• Real estate, including homes and land
• Stocks, bonds, and other investments
• Life insurance payouts
• Family businesses
• College savings plans
• Valuable items like jewelry or artwork

Beyond financial assets, families also pass down knowledge and values about money. Teaching the next generation how to manage their resources can be just as powerful as passing down the assets themselves.

Why most generational wealth disappears

There’s a saying often called the “Third Generation Curse”: the first generation builds the wealth, the second generation spends it, and the third generation loses it. Studies show that 90% of wealthy families lose their wealth by the third generation.

Why does this happen? It’s not just bad investments or market downturns. The biggest reasons are communication breakdowns and lack of preparation. Without financial education, children may not understand how to manage what they’ve inherited. This is why wealth needs to come with guidance—not just money, but also lessons about how money works.

For example, think about lottery winners. Studies reveal that up to one-third of winners end up broke within a few years. The same thing happens with family wealth: Money without knowledge can quickly vanish.

Key Strategies for Building Generational Wealth

Here are a few strategies to avoid losing out on building wealth you can pass on:

Maximizing retirement accounts

Your 401(k) or IRA isn’t just for your retirement—it can also be a tool for generational wealth. Start by contributing enough to get your full employer match, which is essentially free money. When you pass these accounts to your heirs, they can stretch the tax benefits over their lifetimes, turning your retirement savings into a long-term wealth transfer.

Investing in the stock market

The stock market is a powerful wealth-building tool, thanks to compound interest. Compound interest means your money earns returns, and those returns earn returns, creating exponential growth over time. For example, investing $500 a month in a low-cost index fund that tracks the S&P 500 could grow to over $1 million in 30 years, assuming average market returns. That’s a solid inheritance to leave behind.

Creating multiple income streams

Successful families rarely rely on a single source of income. They diversify, building multiple income streams such as:

• A full-time job
• Side hustles or freelance work
• Rental property income
• Dividends from investments

Even starting small can make a big difference. A side hustle earning $1,000 a month could be saved or invested, growing into significant wealth over time.

Building solid passive income streams

Passive income is money that keeps coming in with minimal effort after the initial setup. Examples include rental properties, dividend-paying stocks, and online businesses. These streams can provide lasting income for your family and even sustain future generations.

The key is starting early and building these streams while you’re actively working so they’re stable by the time you pass them down.

Optimizing your taxes

Smart tax planning can save your family tens of thousands of dollars. Consider strategies like:

• Using Roth IRAs for tax-free growth
• Investing in 529 plans for education savings
• Utilizing strategic gifting to reduce estate taxes

The money you save on taxes can be reinvested to grow your family’s wealth even faster.

Managing estate planning essentials

Estate planning is more than writing a will. A comprehensive plan typically includes trusts, insurance policies, and clear instructions about asset distribution. Without a solid estate plan, your wealth could be significantly reduced by taxes and legal fees.

Start with a living trust to avoid probate court, which is often expensive and time-consuming. Update your plan yearly to reflect changes in your wealth and family situation.

Building a real estate portfolio

Real estate is a classic way to create generational wealth. Properties often appreciate over time, and rental income provides steady cash flow. Start with a single property, even a small condo, in a growing area where rental demand is high. Make sure the rent covers the mortgage and provides extra for maintenance and profit.

However, real estate isn’t for everyone. For some, renting and investing in other areas might be a better fit. Evaluate your situation and goals before diving in.

If you’re interested in this topic but aren’t sure if renting or buying is for you, I walk you through how to make the right decision in my video below.

Preparing Your Family for Wealth Transfer

Preparing your family for wealth transfer starts with creating a strong foundation of financial knowledge and establishing open communication to set them up for success.

Teaching financial literacy

Start teaching your children about money early. Let them manage a small bank account, participate in family budgeting, or make decisions about how to spend or save their allowance. Everyday moments like grocery shopping or paying bills can be lessons in financial responsibility.

Having family money talks

Regular family meetings about money can be transformative. These shouldn’t be lectures but rather open discussions about your family’s financial goals and values. Share your successes and mistakes—children often learn more from stories of financial missteps than from vague or abstract lessons.

To help you get started, you can download my free One Hour Monthly Money Meeting Guide below:

What happens when you don’t have these money talks regularly?

Kenna and Ryan, a couple with two young daughters and a new house, share a good example of how a lack of financial knowledge in their early lives created debt later on.

[00:09:59] Kenna: The weeks that we were short, we would get behind because we don’t ha– at that time, we didn’t have very much savings at all. Um, and then on the weeks that we would get ahead, we would just spend all the money that went ahead instead of saving it.

[00:10:15] Ramit: Okay. Got it. And what would you tell yourselves at the time? What was the story you told yourselves?

[00:10:21] Kenna: That. You can’t take it to the grave with you, you may as well–

[00:10:23] Ramit: Oh, who said that? You or you Ryan?

[00:10:26] Kenna: That’s what I heard growing up.

[00:10:29] Ramit: What a shock.

[00:10:31] Kenna: Yeah. I lived in a very conflicting house. Money didn’t grow on trees, and also can’t take it to the grave with you, so if you have it, you may as well spend it.

For Kenna, household spending patterns in her childhood pushed her to frivolous spending as an adult. For Ryan, it had the opposite effect.

[00:15:26] Ramit: Ryan, think back to when you were a kid. What do you remember about money growing up as a kid?

[00:15:33] Ryan: Now that I’m older and looking back, I have a different view on it, but it was definitely acting like we have money, and maybe the nice house, but not able to go do things. So it was a lot of fakeness in association with money for me, watching my mom and her husband. Go ahead.

[00:15:53] Ramit: Uh, your parents were divorced early on?

[00:15:55] Ryan: Oh yeah. I never knew my dad. Uh, he was just not in the picture until I was already, what, 36 years old. And, uh, so it was just my mom, single mom. And then she got remarried when I was five and had my brother and sister, and then he was the primary moneymaker. She was a stay-at-home mom. And, uh, like I said, they always acted like they never talked about money. I never heard them talk about money. They never talked to us about money. If they struggled, I never knew it. But now looking back, it was a lot of false fronts.

Kenna and Ryan’s experiences highlight the importance of teaching children about money early and having honest, ongoing conversations about finances. By preparing your family with the tools and knowledge they need, you can break harmful financial patterns and empower future generations to build and protect wealth.

Creating a succession plan

Decide who will handle different parts of your wealth. For example, one child might take over the family business, while another manages real estate investments. Write down your family’s financial values and goals to ensure your legacy lives on.

What Not to Do When Managing Generational Wealth

Passing down wealth is about more than just leaving behind money—it's about equipping your family with the financial tools, knowledge, vision, and systems to sustain and grow that wealth responsibly. Don’t make these mistakes:

Mistake #1: Treating your kids like “trust fund babies”

Shielding your children from financial struggles might seem like a kindness, but it often backfires. Kids need to experience earning and managing money early to avoid entitlement or irresponsibility later.

Just because someone has a trust fund doesn’t mean they’re equipped with the financial literacy to use it. In the case of Kate and Andy, Andy’s $1.1 million trust fund has no positive effect on his poor relationship with money. His anxiety over spending even leaves him wearing sneakers with holes despite his household’s combined $200,000 annual income.

Ramit Sethi: [00:11:50] Have you ever felt good about money?

Andy: [00:11:56] I guess no. I guess I should now, but I don’t. I mean, I’m just being honest with you.

Ramit Sethi: [00:12:01] I appreciate the candor. Do you think you ever will feel good about money?

Andy: [00:12:07] I think if I’m equipped with the knowledge that I’m doing, then I’ll feel better, but I don’t necessarily have a person, I don’t have parents, I don’t have a lot of family to guide me with this information, and I think that’s part of the problem.

Andy’s story shows that wealth alone isn’t enough—without financial literacy and guidance, even a substantial trust fund can lead to insecurity and poor decision-making.

Mistake #2: Keeping your finances a secret

Hiding your wealth and financial plans from your family creates chaos when you’re gone. Surprise inheritances may sound dramatically exciting in movies, but in real life, they often lead to confusion and poor decision-making.

Mistake #3: Failing to update your will

A will written 20 years ago is likely outdated. Over time, your family’s needs will change, the economy will change, and so will your wealth. Your plans need to keep up. Schedule an annual review of your estate plan to keep everything current.

By following these strategies and avoiding common pitfalls, you can build a legacy of financial security and opportunity for your family. Generational wealth isn’t about how much you have today—it’s about creating a system that allows your family to thrive for decades to come.