The following is a guest post from Bull, the creator of BlueDollarBull. A site dedicated to helping you create intergenerational wealth. Bull creates resources to help you bolster your family coffers and writes no-fluff content to help you reach your financial goals, and then build a family legacy of your own. Bull managed to build a seven-figure net-worth on a single income in a blue-collar profession by age 26. Now he’s working towards building a dynasty with his wife, Mrs. Bull. I trust you will enjoy this post from Bull.
4 Pitfalls for Wealthy Families (and how to avoid them)
Why is it that many of us start out with so little, despite our families not perpetually getting wealthier with each passing generation? Who among us wish we started with more to build off of? For our parents to teach us about finance, investing and debt?
Unfortunately for most of us, wealth is something that seems lost between generations. The Scottish put it best “The Father builds, the Child buys, the Grandchild sells and his child begs.”. It has been a cycle that repeats itself time and time again throughout history.The Father builds, the Child buys, the Grandchild sells and his Child begs. Stop the cycle. Read more here. Click To Tweet
For families to truly build wealth, there must be an intentional plan, a strong wealth-centric culture and a sense of permanence among all members. A truly wealthy family with the proper structures and culture could lose everything and still build it back again. Wealth is the sum of the human capital, not a dollar amount. By building intergenerational wealth intentionally, as savers, investors, entrepreneurs or otherwise, we are able to use our accumulated wealth to provide ample opportunities and greater wealth to the next generation.
With each generation earning an amount in a lifetime, through whatever means is best suited to them, why is it that each generation isn’t growing upon the existing family wealth? While it’s difficult to generalize why this is such a common occurrence, there are several pitfalls families fall into on their journey to build wealth. Here are 3 of the big ones.
Too much competition will wreak havoc on a family’s wealth. Fact. Often times we’re told that competition is good. And often times, it is. But let’s save competition for sports – especially when it comes to families. If all members of a family are competing to be the wealthiest or to have the best stuff or the most traveled or otherwise, it is actually a huge hindrance on every other member. It’s a battle you can never win because one of you will always be trying to get ‘more’. The problem is that ‘more’ is never enough.
For example, if you approach finances with a competitive mindset, you’ll always be trying to out-compete one another. You might compete on how much you have invested in real estate for example. This can lead to making silly purchasing decisions on inappropriate properties that can cost you dearly. If you’re trying to get the best ‘stuff’, each of you will always be competing for a nicer car, or a new kitchen or the best and newest toys for your kids. All of these things are big traps when trying to build wealth. Cars usually only lose value, kitchens wear out and get outdated (and you can always spend more!) and toys can be handed down. You get the idea.
If you’re competing, everybody is always losing at one time or another, then trying to get back to a ‘winning’ state. If you were to start a plumbing business and you had a sibling who started an accounting firm, instead of handing customers over to one another where the opportunities arise, you instead rob a family member of the potential customer. The same would happen in the opposite direction. All involved could have benefited from a shared clientele. Instead due to a competitive nature, you both lose out on expanding your business by feeding one another clients.
The same is said about relationships, emotional distress, spending, homemaking and so on. Competition of this nature can only lead to frivolous decisions. Instead, you should adopt a cooperative culture in your family, one where all members help and support one another through thick and thin. By doing this, not only will you help each other in business, finances, emotionally and in hard times. Cooperation builds an environment rich with trust. You also won’t be dedicating unnecessary energy to trying to outperform one another in an isolated environment, and will instead be able to build one another up in a shared environment.
Avoid mixed messages. This is true of parents of young and old children. If your aim is to keep money in the family, you need a consistent parenting style and ideations between parents. This gives kids(young and old) a sense of stability and keeps objectives clear and concise. If one parent is all about stringent study and the other is more on the side of leniency, the kid will have mixed messages about the value of their education and most likely struggle to take genuine interest or approach it seriously.
The same goes for money. If Mom is all about being frugal and saving expenses, then Dad goes out and buys a new boat, mixed signals are being sent about money to their kids. It’s important for both parents to discuss family affairs and problems and find a middle ground. While compromises may lead to both people being dissatisfied, it’s about the greater good of the family, especially the children. There should be a single unified vision for your family and their wealth. Disparity leads to a dissolution of wealth.
Not Planning Ahead
Wealthy families are very forward thinking, so they realize that you can’t simply give wealth away to the next generation and expect it to stay there. Financial management is taught at home, as these families understand that ‘the system’ won’t do it for them. They have avoided the many bear traps of life, like “keeping up with the Joneses”, and have taken steps to secure their family’s future.
If money isn’t earned, then it isn’t kept. We all know what lottery winners wind up with. Wealthy families gradually educate and hand over responsibilities to their children. Kids are taught how to make and handle money and how to be self-sufficient, whether in lifestyle or in business. So if and when they do secure or receive funds, they know the value of the money they have and do not squander it and instead nurture it.
If a large sum is coming your kids’ way from an inheritance, or you plan on them taking control of your family empire, it’s key that your children that inherit it are well versed in how to continue the vision. Part of this harkens back to consistency. If one inherits a stock portfolio with no idea how to manage it, they will sell it and put the money towards what they do know. If they know little of financial management, it will probably wind up going to everybody but the family and everything that it shouldn’t.
This is a fairly typical way money leaves a family and has probably happened somewhere in your family history. If not many times over. Proper structures are also key. If you’ve built up a relatively princely sum you aim to keep in the family, I implore you to seek a lawyer and accountant specializing in trusts. They will help you set up a proper hard structure so if anything were to happen, you wouldn’t get stung with massive estate taxes and poor division of wealth, which can lead to infighting and dispersion of previously close families.
Acting Rich Instead of Being Wealthy
Many people equate acting rich with being wealthy. While for those that are ultra-wealthy this can ring true (though the expression of wealth is a way to lose it!), a dollar saved is far more powerful than a dollar spent. This fact isn’t lost on wealthy families. Every dollar a family member earns will become $46.90 compounded annually at 8% over 50 years.
So every dollar spent frivolously is like ‘robbing’ the future family members of $46.90. Now, this may not seem a lot on its own, but if you had, $1,000, $10,000 or $100,000 things start to add up fast. Inflation does play its part, but even if we use average inflation of 3%, that’s still around $10.70 in modern dollars. That’s a modern value of $10.70 your future family doesn’t have to earn back.Every dollar a family member earns will become $46.90 compounded annually at 8% over 50 years. So every dollar spent frivolously is robbing the future family members of $46.90. Click To Tweet
A dollar now might buy you a candy bar or two, a short-lived treat that spends more time on your waist than it does in your mouth. Would you rather your grandparents have spent their dollar equivalent(about 14c) on candy, or for your family to have a modern ten dollars worth of stocks, property, education or a business? Imagine if they’d saved just $1000 dollars in 1968 and tucked it away into a balance of growth stocks. While hard to scrape together at the time, it could be $46,900 today.
Let’s expand this out and apply this in the modern day. Say you took this inheritance and added a bit to it. You choose to purchase a car that costs $50,000 more than what you actually ‘needed’ – this would mean you’re taking away $2,350,000 – that’s $2.35 MILLION from your family over the course of 50 years($535,000 dollars in post-inflation value). If you had a total of 9 grandchildren, this is a whopping $260k each they could have to invest into building even more for the family. Imagine starting your financial journey with this sort of money (and armed with a financial education).
Swing From the Vines!
By working towards building a cooperative family the whole can achieve more than each of its members working in isolation. Cooperation helps families through the bad times and raises them higher in the good times. Competition with the other family members means somebody is always losing. This impacts the decision making processes of the competitors. Consistency is the key to success. Find out what works and keep doing it. The same goes for wealthy families. By creating inconsistencies, members, especially kids, get mixed messages that ultimately lead to poor outcomes and interpretations. disagreements over money, even if both parents are well-meaning in their approach, will ultimately mean the child will relate money to negativity, rather than anything positive.
Having a plan forward…WAY forward is crucial to the success of any individual, and infinitely more so for intergenerational success. Of course, sometimes you have to roll with the punches but even the most direct flight still has to make adjustments for variables. Bringing your family up to speed gradually will ensure that they are prepared for intergenerational handovers. Handing more responsibility over will ensure full capability when the time finally does come for them to take the bull by the horns.
By spending your families money to try and appear rich, you’re robbing them of their chance to becomes truly wealthy. A dollar saved is worth more than a dollar spent. Put in the right places it can compound and grow to provide your family with wealth for generations to come. Remember, wealth doesn’t just mean financial. Spiritual, ethical and intellectual handovers are all other forms of wealth that can be handed between each subsequent generation. And all of it comes down to creating a culture, rather than cold hard cash. You can learn more about Intergenerational Wealth and Dynasty Building over on my site, BlueDollarBull.
Thank you, Bull, for your insight! This is truly eye-opening for those who crave chocolate as much as my wife… Just kidding. Seriously, thank you for this piece, and if you, the reader, have any questions or comments, you can reach me here.