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July 16, 2020, 1:39 p.m. EDT

What is generational wealth and how do you build it?

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By definition, generational wealth represents assets passed down from one generation to the next. If you can leave behind a notable inheritance to your descendants, that constitutes generational wealth. These assets can include real estate, stock market investments, a business, or anything else which contains monetary value.  

People who inherit generational wealth have a significant financial advantage over those who do not. They likely have the ability to avoid student loans as well as other types of costly debt. Instead, their inheritance could go towards income-generating investments , assets which appreciate in value, or even towards purchasing their first home. 

However, it’s not easy to maintain generational wealth across several generations. In fact, research shows approximately 70% of families lose their capital in the second generation while 90% lose it in the third.  Not great odds for building sustainable wealth over several generations. 

These are some strategies to build generational wealth as well as ensure it lasts .

How to build generational wealth

To generate wealth you can pass on, you need to acquire assets or save money you won’t need to spend in retirement. You then pass down the money and assets to children or other younger relatives. 

While the concept is simple, unless you had wealth passed down to you, accumulating extra assets can be slow. Fortunately, it’s entirely possible if you are strategic with your finances. These four strategies are the most accessible paths toward building generational wealth.

Invest in stocks

Stocks are arguably one of the best ways to build long-term wealth. Some people recommend starting by investing in index funds that carry low costs. An index fund is a type of mutual fund or exchange-traded fund (ETF) meant to match the components of a market index. 

The advantages to investing in index funds comes with the instant diversification and not carrying the responsibility for picking out individual stocks on your own.

You can make money from stocks through capital appreciation and income from dividends.  For the former, you follow the tried-and-true investing advice of buying low and selling high. For the latter, you earn these passively when the index funds send the distributions to your brokerage account 

However, in terms of generational wealth, your initial goal focuses on capital appreciation as you set aside more money and your investments grow in value.  As you age and wish to take less risk, you transition toward a capital preservation strategy. This is a similar strategy baked into the best target date funds , which automatically transition the funds’ holdings over time as you near your target retirement date.

Invest in real estate

Real estate is something tangible which can produce income for your beneficiaries. If someone inherits an investment property, after paying for the costs of owning and operating the rental, the new owner can receive ongoing cash flows. Rental income also has several tax advantages, like having the ability to claim depreciation as a tax deduction, among the many other deductible expenses related to maintaining the property. 

While prices do fluctuate, homes have consistently increased in value over long periods of time. As a result, if the next generation does not wish to continue owning the home, it should be able to sell for more than you initially spent.

Save money strategically

Wealth comes not just from making money, but from saving it as well. As you receive distributions from stocks and other investments, rental income from real estate or money from other income sources, put aside as much as you can in a place where it will continue to grow. Ideally in tax-advantaged accounts first.

Create a business to pass down

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