In boxing and mixed marital arts, there is this unwritten rule that you are not a true champion until you have defended your belt. The principle is built around the idea that anyone can get lucky and win a match, but a champion can prove it wasn’t a fluke by winning again. Building wealth is similar in the sense that someone could win the lottery or make one right stock pick, but building generational wealth is something different altogether. It is estimated that 70% of wealthy families will lose their wealth by the second generation and 90% will lose their wealth by the third generation. To successfully build generational wealth that will last, you need a consistent and repeatable process that will get you consistent results.

Three ways to build generational wealth

There are three ways to start building your wealth. Bob Proctor calls them M1, M2 and M3. The first is the most common, but least effective manner in which to build wealth. This is to get a job and trade time for money. The problem with this approach is you only have so many hours in a day and so many years in your life. As a result, you are limited in the amount of income you can generate in a lifetime. There are some in this group who will save a portion of their money each month, but that will ultimately mean you are sacrificing your life to build generational wealth.

The second approach to building wealth is to use money to make money. In the book, The Richest Man In Babylon, they discuss ways to put your money to work so that your money is making money, even while you sleep. This group will include the likes of Warren Buffet, Robert F. Smith, Jack Bogle and Phillip Fisher to name a few. Most people invest in the stock market, real estate or business ventures, but few are able to make a living through investing. If you are unable to start with this strategy, you should have a plan to get here.

This leads us to the third and final approach to building generational wealth. In the third approach, you find yourself creating multiple sources of income to build your wealth. This approach is taken by the smallest percentage of people, but is the most effective. Think about it. You can have income you earn from work, while having rental and dividend income generated passively. If you have a business, you have the profits or salary you pay yourself through your business, while also generating passive income from royalties and capital gains.

How self-made millionaire’s build wealth

Research shows the number one attribute self-made millionaires have is they have multiple income streams. Similar to the benefits of diversification in the stock market, you need a diversification of income too. If you want to build generation wealth, you need to create multiple streams of income. Did you know:

• 65% of self-made millionaires have three income streams
• 45% of self-made millionaires have four income streams
• 29% of self-made millionaires have five or more income streams

According to the IRS, the below are seven ways millionaires diversify their income:

• Investment income: Stocks selected because they have a strong dividend paying potential
• Earned income: Paycheck income from a job or contract employer
• Rental income: Rent from real estate you own
• Royalty income: Royalties paid to you for the right to use something you created (invention, product, company name, copyrighted or trademarked material)
• Capital gains: Most commonly profits from stock investments, but can include other appreciated assets
• Profits: income generated from a business (revenue minus expenses)
• Interest income: Lower risk income generated by holding your money in a savings account, CD, bonds and other lower risk investments.

Recognizing that 65% of self-made millionaires have at least three streams of income, you need to plan to do the same. Look at the list above and see which ones make the most sense for you to incorporate.

Your wealth grows when you grow

I am someone who believes that wealth is only the visual representation of the growth you have taken internally. To put it another way, if you were to redistribute all the wealth in the world and evenly divide it amongst the population, the wealth would return to the original owners over time. This is why the majority of people who win the lottery find themselves broke in three years. They have not undergone the internal growth necessary to maintain the wealth they received from the lottery.

This is also part of the difficulty many face when they leave an inheritance for their future generations. The growth you have undergone to create your wealth has changed you in many ways. If you built your wealth through a business venture, you have learned to operate a successful business along the way. You learned how to hire staff, market your company and promote your services.

If you were to appoint one of your children as the CEO of your company without any prior knowledge, they would struggle immensely. As successful as your company may be, it will not last if you simply hand it over to your children. If your children are going to be successful, you must groom them for leadership. They may need to work their way up the company ladder by learning the day-to-day operations. That way, when a problem arises, they will have the experience to understand and address the situation. The same holds true when it comes to your finances.

Share your wisdom

You can build generational wealth that will last by teaching your children about your day-to-day decision-making process. Share what percentage of your money goes back into the business, how you choose your stocks and what type of projects are worth pursuing.

Discuss how you budget for unexpected expenses and how you decide what isn’t worth allocating money towards. Help them navigate sharing wealth with family and friends in need. Think of your family wealth as if it were a business. You cannot simply assume the right decision will be made, nor can you give money to every family member who has a business idea or medical expense.

Keep in touch

You need processes and effective communication in place to ensure your family is operating in an efficient manner. This is one of the most overlooked aspect of how to build generational wealth that will last. You need to make sure you are documenting the wisdom you have learned over the years and creating processes to deal with similar issues in the future. Creating processes is just the tip of the iceberg when it comes to effective communication. Wealthy families will not be able to maintain their wealth if they don’t pick up the habit of regular communication.

When executive members don’t communicate in a business, two things are likely to happen. First, the business dissolves and each member take a percentage of the company, all but ensuring the family wealth will not last for future generations. The second is everyone is spending the money without any accountability; which ultimately means the company will become insolvent and cease to exist. Again, all but ensuring the family wealth will not make it to the next generation. You want to make sure your family is meeting at least once a year to discuss how the family wealth is doing. Similar to a board meeting, you need an opportunity to assess how the last year unfolded. This includes, but not limited to:

• An accounting of how money was spent in the previous year
• How the revenue streams are performing (new money is generated)
• Family mission statement and philanthropic endeavors the family supports
• Approval process to access the money
• Training of future generations to ensure a successful wealth transfer

Final thoughts

The key to building generational wealth that will last is not as much about passing on the wealth, as it is about passing on the wisdom. Wisdom creates the necessary discipline for you to do what you know you need to do, when you need to do it. Otherwise, the knowledge on how to build wealth will be useless. Similar to someone knowing the key to losing weight is to eat healthy and exercise. Even though most people are aware of the relationship between weight and calories, most people are not the weight they want to be. Without the wisdom of knowing why it benefits you and how to approach such a goal, you won’t be successful. As you pass on the wisdom you have learned while building your wealth, your future generations will be better equipped to maintain and grow the family’s wealth for generations to come.

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