I’ve been reading a lot about generational wealth on financial social media from millennials and generation X parents, and how it’s something they aspire to. There’s inflation to contend with, rapidly rising housing costs, and everything is just costing so much more. As a parent you worry about your child growing up and not being able to afford a home for themselves (the Canadian dream, right). I think it’s great that parents want to help their children and want to see their child succeed, but sometimes giving too much can create the opposite effect of success.
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What is Generational Wealth?
Generational wealth means the accumulation of assets, investments, and basically money passed down from one generation to the next. It provides families with a significant advantage in life and allows them to have access to increased opportunities and a more comfortable lifestyle.
Unfortunately, even though some may argue that there’s no way that passing on your money to the next generation is a negative thing, I believe that there are indeed drawbacks to generational wealth.
When you buy a Fendi purse or a Louis Vuitton wallet for yourself to declare your wealthy status and share how hard you worked for that purse, sure by all means go ahead. But when you buy Fendi socks for your children (they are $40 a pair by the way), Burberry toddler pants at $370 a pair, and fly your children first class all the time, it might likely be setting them up for something else.
Even though you can afford it and it’s nothing to you (even if you’re a billionaire) it might hinder your child’s future ability and future success.
They may be accustomed to this lavish lifestyle and continue to spend like that even as they earn their own money (but the money they earn pales in comparison to the money that you have given them).
I have a friend like that. His family is wealthy and he now has children of his own. He earns six figures himself working in a career different from the career his parents established for themselves. His children (under 10 years old) are decked out in designer clothing (I’m not talking about Tommy Hilfiger lol). I’m talking about Fendi socks. He seems to be just gushing with money but I am assuming likely not his own money.
We All Want to Help our children but…
Have you heard the saying that 70% of wealthy families lose their wealth by the second generation and 90% lose their wealth by the third generation?
This is similar to the statistic that 70% of lottery winners spend all the money that was won within 5 years or less.
Easy come easy go, when that money comes so easily without having “earned” it or put the effort into attaining it, the value of that money and where it came from isn’t fully understood. This can lead to reckless spending and poor investment decisions (if there is even any forethought to investing the money at all).
We all want to help our children succeed in life, but unfortunately there are a few ways that ‘setting them up for life’ doesn’t set up your money to last.
Generational Wealth Lost
Unfortunately in my own extended family this seems to have been the case.
My mother came from a wealthy family. She grew up with private school and had a hired help in the home. She herself is irrationally frugal with certain things but two of her brothers were quite lavish with their lifestyle.
One bought a Ferrari (and ended up having to sell it for a loss a few years later), another had a Rolls Royce. The brother who had a Ferrari continued down the path of reckless spending and unideal management of his personal finances and ended up living in government housing because he has no more money. His siblings are in charge of managing what money he has left and they give him a certain amount every two weeks so that the spending is more controlled.
They had opportunities, extra curricular classes, they had a chance to go abroad for post-secondary education, and yet didn’t learn about money and how to save and invest it and perhaps didn’t have the motivation to earn their own money. They were content and complacent.
I wonder if it’s because my grandfather didn’t have the time to talk to his children about money, the value of hard work, or share his values in relation to money, since he was so busy building his business.
How to Preserve Generational Wealth
You’ve probably worked all your life to earn your money and you are probably borderline obsessed with keeping and preserving that money (for example trying to not pay more taxes than you need) but at the same time you may not be realizing the biggest danger to the preservation of your wealth. That’s your own children.
So how does one prevent your money from going “poof” into thin air within one or two generations?
Keep the Lifestyle Inflation at a Minimum
I follow Jesse Itzler on Instagram for his inspirational clips. He himself is a millionaire at least by $200 million and his wife Sara Blakely is the founder of Spanx, and is a self made billionaire. Yes, you read that right, a billionaire.
Sara Blakely worked hard. She came from nothing. She was used to failure and being told no. She went door to door selling fax machines. She got rejected to be a Disney character (Goofy) at Disney World because she was too short. Her dad encouraged her to fail when she was younger and told her to redefine failure as not trying rather than being so focused on the outcome.
And yet for their four kids (with the youngest being 8) they focus on spending time with their kids on experiences and encouragement of their accomplishments rather than a lavish lifestyle.
For example, Jesse Itzsler took his children on a ski trip and flew Delta in economy class. One commenter asked why a billionaire would be flying economy and Jesse Itzler responded back something along the lines of, it’s none of your business and “I’m raising kids”.
Have Conversations About Money
Having conversations about money is important and also about how difficult it might have been for you to accumulate that money- it might seem easy now at a glance but the struggle to build that business or investment was pronounced in previous years.
Yes that might mean starting off with “Back in my day” stories.
Give Them Enough
Finally, I’m not saying don’t give your children anything, but perhaps consider just giving enough.
Warren Buffett is not giving his children the $100 billion net worth he has accumulated and is known for saying “leave the children enough so that they can do anything, but not enough that they can do nothing”.
Instead of leaving a boat load money to pass down, think about leaving your values to pass down. Working hard, having grit, accepting failure, encountering obstacles… even though your family may be comfortable, you can still instil a good work ethic.
I believe that leaving them too much money especially at an early age decreases motivation to succeed on their own.
We are humans and naturally are proud of what we have built on our own, therefore when you are handed money that you didn’t build, you naturally feel like it’s not really your money and therefore you might not attach as much value to that money.
Of course, generational wealth offers a number of benefits for your children, including increased opportunities, less stress, a comfortable lifestyle, and not having to struggle. However, the the picture is not that rosy. Dare I say it, entitlement, decreased work ethic, and decreased fiscal responsibility are all potential drawbacks to generational wealth to be aware of.
You may also be interested in:
- Best way to invest money in Canada
- Don’t be financiall dependent on a man
- How to fight back against the motherhood penalty
- Top 1% net worth in Canada
What do you think about generational wealth?
GYM is a 40 something millennial writing about personal finance since 2009 and interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for a free dividend yield spreadsheet and the free Young Money Bootcamp PDF.