How to build generational wealth

Many people wish they had a financial head-start in life. Just imagine where you might be today if your parents were able to pass on some form of wealth, a family business, or assets like property or investments and financial savvy.

While it might seem out of reach to start creating generational wealth due to financial pressures caused by current economic hardships, you can begin to create generational wealth by taking a few small and simple steps.

It could include saving a small amount each month for a deposit on a home, investing a small amount in a tax-free vehicle for your child’s education or taking out a life insurance policy. Making sure that you create wealth that can be passed on to your children can put them on the trajectory towards financial independence.

If this wealth is preserved, it can end up being passed on to the generations that follow, impacting their trajectory too and ensuring that every generation lives better than the last, says Thopi Mhloli, product owner for savings and Investments at Standard Bank South Africa.

Greatest gift you can give: life insurance

Many people view life insurance as a tool to ensure their loved ones are protected when they are no longer around and this is of course an important component of life insurance. When you die, the lump sum death benefit paid out to your family will ensure that they can continue to live in the same way, cover the bills and put food on the table.

However, the proceeds from the payout could also be used to pay off a family home that your children inherited, providing them with an asset or to fund university education or have extra cash to put away into savings and investments accounts that could all go towards building more generational wealth.

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Tax-free saving can set up children for life

Various tools are available to house long-term savings, but the Tax-Free Savings Account (TFSA) has emerged as a favoured vehicle to park assets over a long period of time. Many parents opt to open a TFSA for their children or dependents who will one day be able to access the funds to fund their education, buy their first home, or start a business of their own.

Parents and legal guardians can set up a TFSA in a child’s name. The benefit of TFSAs is that interest or capital gains earned on the money saved is tax-free. If you use a TFSA to save for your children and it is in their names, remember the R500 000 lifetime limit by the time they come of age. While some may view this as a flaw in the system, it allows for your next of kin to invest a lump sum amount into another investment vehicle or asset.

Keep the family home in the family

Property ownership drives wealth creation. Beyond providing you with a place to call home, it becomes an asset if managed properly that can provide financial security and enable opportunities for further wealth creation. The physical asset and any further wealth created can then be passed on to your loved ones and generations to follow.

While the high interest rate environment has pushed home loan instalments higher, the good news is that it helps those who are able to boost their savings pot. Higher interest rates are advantageous for savers, as it means they can earn a higher interest on their savings. Therefore, if you can save towards a deposit on a family home, which would bring the total cost of your home loan down, now is a good time to do so.

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Foundation for future prosperity

Another way of setting your family up for a secure financial future is by not passing on any financial burdens to your family when you die. This means working to pay off your debts or making sure that there is protection in place to cover that debt, such as credit life insurance, if something happens to you.

Similarly, failing to plan for certain expenses, such as funeral expenses, could place your family at a financial disadvantage and might delay other life goals. Affordability is of course an issue for many people now due to the economic environment but fortunately, there are flexible options such as funeral policies that make it more affordable for people to make necessary provisions and secure a future for their loved ones.

“Every small step you manage to take is a step towards building something that your children will inherit one day. If you face financial pressure and do not have spare cash, you could consider empowering yourself with knowledge about saving and investing with free resources online and sharing those learnings with your kids, or by starting a side hustle. And you never know that side-hustle might turn into a main hustle that grows over time and stays in the family forever.”