What is generational wealth?

One Federal Reserve estimate shows that each year about 2 million households receive some sort of inheritance or substantial gift. That may seem like a lot. But digging into the Fed’s analysis shows a large variety in how—and how much—money is changing hands through these so-called intergenerational transfers.

Keep reading to learn more about how generational wealth is created and how it’s passed down. Plus, revisit one family’s story to see if the lessons they learned about debt and wealth might help you build generational wealth.

Key takeaways

• 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.
• Federal Reserve research shows wealth concentration, racial disparities and other systemic issues play a part in building generational wealth.
• Working toward building generational wealth starts with things like financial literacy, budgeting and goals.

When people talk about generational wealth, they’re typically referring to things of value that are handed down from one generation to the next. These assets might include everything from cash to real estate, art to investments, even stakes in family businesses.

When it comes to spreading generational wealth, inheritances after a person passes away are the most common, according to the Fed. But intergenerational transfers, as the Fed calls them, also include gifts from one living person to another. Those types of transactions are referred to as inter vivos transfers.

People might transfer money to others directly—through gifts or inheritance. 

But indirect transfers are another way to transfer generational wealth. That could mean reducing a person’s financial burdens by paying for major expenses, like education, or using connections to help find higher-paying jobs or other opportunities.

How does wealth concentration affect generational wealth?

A 2018 Federal Reserve analysis of the Survey of Consumer Finances estimated that 2 million households receive a generational inheritance or substantial gift each year. 

But the way those generational transfers are distributed is notable. According to the Fed, most inheritances are for less than $50,000. And only about 2% of the inheritances were for $1 million or more. 

But comparing how much actual money was involved in those transactions—not just the number of transactions—told a different story. 

Despite being just 2% of the total count, those million-dollar-plus transfers accounted for 40% of the total dollars that changed hands. And the figures around gifts among living people showed even wider disparities.

How does intergenerational wealth impact the racial wealth gap?

The Fed’s analysis showed gift and inheritance recipients were “much more likely to be college-educated, high-income, and high-wealth.” Data also showed recipients were 88% white. 

That number is part of why additional Fed research found “the typical White family has eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family.”

Along with intergenerational transfers, the research also cited “homeownership opportunities, access to tax-sheltered savings plans, and individuals’ savings and investment decisions” as major factors that contribute to wealth accumulation and financial security.

Looking at wealth concentrations and racial disparities can make building generational wealth seem like an uphill battle. But it might give you inspiration to look at the success story of others. 

Take the Moody family. When David and Karla Moody started their construction business they were struggling to provide for themselves and their two kids. But they recovered. And their company had completed an estimated $3 billion in commercial projects when they shared their story of generational wealth with Capital One.

So how did the Moodys do it? They paid down debt, took control of their finances and built college funds to try to give their kids a debt-free future.

There’s nothing easy about building generational wealth. But using the Moodys’ example, and some tips from Capital One, might help you get started

1. Start with financial literacy

Improving your financial literacy might be the first step. Understanding the basics of budgeting, credit, savings and beyond can help you make informed choices as you try to build generational wealth.

2. Take a look at debt

It might be hard to save and build if a large portion of your income is going to pay off debt. But there are numerous debt-repayment strategies you might consider to help you develop a plan. As you approach debt, it might help to consider how an emergency fund might help you stay on track if the unexpected happens.

3. Create a budget

Your debt plan is likely to be one part of your overall budget. Having a good understanding of what money you have coming in and where you’re spending might allow you to be more purposeful. If you live near a Capital One Café, you could drop by to learn tips for building a simple budget.

4. Develop financial goals

Once you have a budget that works for you, it might help to be purposeful. That means setting financial goals. Goals can change over time, but thinking about short-, mid- and long-term goals can help you set realistic timelines. 

Generational wealth can mean different things to different people. And things like retirement savings, insurance policies, investments and emergency funds all could be part of the process.

5. Think about the next generation

After building wealth, the second aspect of generational wealth is passing it on. There’s no shortage of ways to do that, but when it comes to a secure future for your kids, it’s worth considering things like insurance policies, wills or trust funds. You might also consider how your child might pay for college.

6. Reassess your financial health

No financial plan is permanent. As your finances change, don’t be afraid to revisit your plans and budgets. A new job or side hustle might bring extra income. New expenses might make you adjust timelines. Regularly assessing your financial situation against your goals is a good way to make sure that you’re working toward building wealth.

Building wealth, like building credit, takes time. As you work to build generational wealth for your family, check to see how Capital One data, products and services come together to make banking easier and more accessible.