Updated: Oct 20
A home is a place to lay down roots, celebrate holidays and create lasting memories – but buying a home may also have long-term financial benefits. Property that appreciates over decades can grow your net worth, offering wealth that can be passed on to future generations.
Chances are you’ve heard the term “generational wealth” as a topic of discussion in the news and on social media, but what exactly does it mean, and what role does homeownership play in building it?
Here, we’ll dig deep to explain what generational wealth is, the challenges you may face while building it and how homeownership could benefit you.
What is generational wealth?
Generational wealth refers to financial assets that are passed down through families to children, grandchildren and beyond. Assets passed from one generation to the next might include cash, investments, property and more.
How homeownership contributes to wealth building.
Homeownership promotes wealth building by acting as a forced savings mechanism and through home value appreciation. Wealth building hinges on the homeowners' ability to build home equity.
Since a home is one of the largest assets many of us will own in our lifetimes, the equity built up through property appreciation and paying down the mortgage can grow your net worth.
Property isn’t a liquid asset – you can’t draw from the equity ATM to buy your kid a pony.
However, you could gift a home while you’re alive, or leave the home to your heirs when you die. Another option is selling the home and passing down cash. Regardless of how you pass your property to your heirs, consult with a tax professional to maximize the benefits based on your own situation or circumstances.
Renting doesn’t offer the same wealth transfer opportunity.
According to a recent study by the Federal Reserve, the median net worth of U.S. homeowners is 40x higher than the median net worth of renters. The median net worth of homeowners is also 2x the median net worth of U.S. households nationwide.
Challenges to building generational wealth.
Unexpected financial emergencies, lack of financial education, and discriminatory policies can deter generational wealth-building. An estate plan, budget and savings goals, and smart investment decisions can help you build long-term wealth for current as well as future generations.
How to build generational wealth.
Here are a few steps that could kickstart your generational wealth-building process:
1. Come up with an investment strategy: Building an investment portfolio that includes stocks, bonds, index funds and property can help grow your assets.
2. Create an education savings fund: Saving early and often in an education savings account can help you pay for a child’s education.
3. Explore homebuying options: If you’re considering buying a house, start figuring out the down payment you need and plan how to save those funds.
4. Review your life insurance coverage: The payout that beneficiaries receive from a life insurance policy is another financial vehicle that could help them build wealth.
5. Update your will and beneficiaries: When assets or final wishes change, adjust your will and change beneficiaries on specific accounts, such as your 401(k), to designate who gets funds upon your death.
6. Teach financial principles: Guide the future generation on how to maintain wealth by teaching budgeting, saving and investing skills.
Building wealth takes time.
Building generational wealth is important because it can give your children and their children a leg up in life. Generational wealth is important because it gives you more freedom to think and live the life you want when you don't have to worry about paying your bills or whether you can afford to quit a job that doesn't fulfill you. This is a head start you may not have had when you started out.
Building wealth is a slow and steady process. Accumulating assets doesn’t usually happen overnight, but consistently saving, investing, and making a strategic home purchase could grow your net worth over time.
Once you get started, pat yourself on the back. You’re a bona fide investor. A planner of retirement. A saver of derring-do! Now go out and tell some friends how it’s done (or send them a link to this guide).