Building generational wealth

Building generational wealth is about creating and passing down financial security that benefits not only you but also future generations. For many Filipinos, the idea of wealth is often associated with immediate needs—monthly expenses, education, or securing a home. However, focusing on building long-term wealth can provide your children and even grandchildren with a stable financial foundation.

Here’s how Filipinos can take concrete steps to build generational wealth, including strategies such as smart saving, investing, entrepreneurship, real estate, education and life insurance.

1. Start with a strong financial foundation

Before thinking about long-term wealth, it’s essential to establish a solid financial foundation. This includes getting rid of high-interest debt, setting up an emergency fund and creating a budget that allows for both current needs and future goals.

• Clear debt: Pay off debts with high interest rates, such as credit card debt or personal loans. This will free up more income for saving and investing in wealth-building assets.

• Emergency fund: Set aside at least three to six months of living expenses in a high-interest savings account. This will protect you from financial setbacks and prevent you from dipping into long-term investments.

• Budgeting: A clear and realistic budget helps you avoid living on paycheck to paycheck. Prioritize saving and investing over unnecessary spending.

2. Invest in education

Education is one of the most powerful tools for building generational wealth. By investing in your own education and that of your children, you increase the chances of securing higher-paying jobs and better career opportunities.

• Personal development: Continuous learning, upskilling, or pursuing advanced degrees can open doors to higher income brackets. In the digital age, numerous online courses provide opportunities for personal and professional growth.

• Children’s education: Set aside funds in educational plans or investment vehicles like a unit investment trust fund (UITF) or mutual funds that can grow over time. Prioritize long-term investments over short-term savings.

3. Save and invest early

The key to building wealth is starting as early as possible. Compound interest—where the interest you earn on savings or investments generates additional earnings over time—works best when given time to grow.

• Start with high-yield savings accounts: For short-term goals, place your savings in accounts that earn more than a traditional bank savings account.

• Invest in stocks and bonds: The Philippine Stock Exchange offers various opportunities to grow your wealth through equities. For those who prefer less risk, government bonds or corporate bonds provide safer investment alternatives.

• Long-term investment plans: Consider instruments like VUL (variable universal life), a combination of life insurance and investments, to provide both protection and wealth accumulation.

4. Start a business or pursue entrepreneurship

Many of the world’s wealthiest families maintain their fortune by passing down successful businesses. Entrepreneurship can provide multiple income streams and lay the foundation for financial independence, making it a great way to build wealth for future generations.

• Build a family business: Starting a small business that can be expanded over time, such as a “sari-sari” store, restaurant, or online business, is one way to generate wealth that can be passed down.

• Invest in franchises: If starting a business from scratch feels overwhelming, investing in a proven franchise model is a less risky way to grow wealth.

• Teach entrepreneurship: Encourage your children to think about business opportunities and teach them the value of creating wealth through their efforts. This could be through family involvement in the business or supporting their ventures.

The goal is to create a business that can thrive beyond your lifetime, giving future generations a head start.

5. Protect your assets with life insurance

Life insurance is a critical part of building generational wealth. It ensures that, in the event of your untimely death, your family is financially protected. Moreover, some types of life insurance also have investment components that can help grow your wealth while you’re still alive.

• Term life insurance: This provides coverage for a specific period, ensuring that your family can cover expenses like mortgage payments, education, or daily living costs if you pass away unexpectedly. This type of policy is usually more affordable but does not build cash value.

• Whole life insurance: This offers lifelong coverage and builds cash value over time, which can be borrowed against or cashed out. Whole life insurance can serve as a financial safety net and help pass on wealth to your heirs.

• VUL: As mentioned earlier, this combines life insurance with investment options. A portion of your premium is invested in funds like stocks or bonds, allowing you to grow your wealth while securing financial protection for your family.

Life insurance can help you leave behind a financial legacy that will support your family for generations to come.

Building generational wealth requires discipline, planning and long-term thinking. We need to focus on education, saving, investing and protecting our assets through life insurance. We can all lay the groundwork for financial security that benefits not only for ourselves but also future generations. With proper financial planning and the right strategies, we can create a legacy that will last for many years.

Randell Tiongson is a registered financial planner at RFP Philippines. To learn more about financial planning, attend the 108th RFP program this October 2024. Email [email protected] or visit rfp.ph.