“70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third generation.”
This is the scary statistic in the US according to the Williams Group wealth consultancy. With the amount of sweat, effort, time, and other sacrifices we make to build wealth and provide a legacy for our children, the last thing we want to hear is that our next generations are going to fritter it away.
As a US citizen who came here as an immigrant, my thoughts about generational wealth are not only about creating security for my children while they live with me, but also to ensure that my children, grandchildren, and their children never have to worry about slogging it out to live a reasonably comfortable life. America is the land of opportunity and we do everything we can to expand those opportunities for future generations.
It starts with ensuring our children get a strong and challenging education. We treasure the incredible public education system and seek out school districts that will equip our children with critical thinking skills and tools to navigate a tough world. We work hard to buy a house that provides stability to our children while growing up. When our children grow up, we often support them through college, helping them buy their first house, and give them a grand wedding.
Through all of this, there is potentially one area where we might be falling short and that is an understanding of wealth and how to protect and grow it. This happens usually because we stumbled through it ourselves and we assume the kids will figure it out.
A wise friend and passive investor in some of my group investment projects once told me that children observe their parents much more closely than we imagine. So if we give them the opportunity to observe our wealth chakra activities in action, they are more likely than not to grow up better informed and capable of managing their inheritance.
Recognizing this, I’ve started looking for opportunities to include my children with many of my investing activities.
Talk to your kids about money
A friend once told me that he will not talk to his kids about money or wealth because he doesn’t want them to grow up feeling entitled or thinking they won’t need to work. I understand the sentiment. However, I think it is counterproductive. Teaching your children the ethic of hard work doesn’t have to be mutually exclusive to guiding them on how to manage, spend, and invest their money.
Instead, I recommend a completely open approach. I talk to my kids about my financial situation in positive terms. I explain where my limitations are today and what I aim to accomplish. I explain to them why I’m doing what I’m doing. I illustrate to them why I believe that the investments I’m making, whether in commercial real estate or in businesses, are aimed at creating long term residual income and why that is so desirable.
To contextualize things for my children, I also talk to them about potential career choices and how passive income can allow them to do anything they want without worrying about the earning potential of that career. I discuss ideas with them on how to find creative ways to make income. We even started reading a book together on how to become a millionaire before they turn 25. It was a fun read though the kids haven’t followed any of its suggestions so far 🙂
Finally, I employ my children to help me out in my business whenever they have time away from school work. For instance, last year I had my younger child scan all of my expense receipts and categorize them in an Excel spreadsheet to make my tax filing easier. I paid her for it. Later, I’ve also paid her to collect information and put it into a format that I can email out to my passive investor group.
Every opportunity to engage, no matter how small, helps them see close up how wealth is built and managed. Hopefully, these experiences will carry forward with them when it’s their turn to invest and grow their wealth.
Establish values for your children on how to handle money
Going back to my friend’s fear that his children will not value the wealth he’s earned and will take it for granted. The reality is that your children will only do that if that’s what you let happen.
If you’re giving your children a strong education and not showering them with gratuitous gifts at every turn, there is a good chance your children already value things other than money. A strong education needs to include values and ethics at home that have been integral to your own upbringing. That doesn’t mean constantly telling them about how you grew up with difficulties, but rather finding ways to demonstrate those values.
For instance, your child asks you for a cell phone. You discuss with your spouse and feel that a cell phone for a young child could be a distraction. However, you also feel it will help your child with safety and the ability to call if they are in difficulty. At that point, you’re not going to rationalize that you grew up without a cell phone so your child can too. It’s a false comparison. You grew up in an era with rotary dial phones. You’re not going to install one of those in your house.
So, now you’ve given your child a cell phone. This is an opportunity to instill values. Make it clear that the phone is a privilege and not a right. Install a parental control app but explain your expectations to your child about responsible usage and dealing with the risks on mobile apps. Further, you also set expectations with them on ensuring the cell phone does not become a distraction and their school performance does not suffer in any way.
You’ve provided your child with a small asset and shown her how to use it responsibly. Your supervision and guidance have established a value paradigm for your child.
Show your kids how to protect wealth
Often, we have a tendency to talk to our children about wealth in two ways – how to earn money, and how to save money. Some of us will talk to them about investing as well and the importance of making your money work hard for you.
However, a key gap in communication with children is how to protect what they have. There are three primary ways to lose wealth – paying too much tax, making bad investments, and someone taking it away through lawsuits.
It’s much harder to teach your kids your wealth protection because the reality is that most of us don’t know how to do that either.
Working with an estate planner is critical to ensure we don’t pay more tax than needed. This is usually done through the establishment of trusts. This area of tax law is so complex that some attorneys solely specialize in it. The difficulty is that when we talk to three different estate planners we get three different plan recommendations. I don’t have a solution for you. All I can say is that go with the plan you understand. Avoid plans that sound fancy but that tie you up in knots. If you don’t understand it, neither will your children and one critical thing you need to always keep in mind is that you need to ensure your children understand the plan when they are of a suitable age. They will follow in your footsteps and create similar plans for their children.
Bad investments happen when you invest in things you don’t understand. Bad investments happen when you invest blindly in people you don’t know or haven’t taken the effort to get to know. Bad investments also happen when you invest based on pure speculation rather than any intrinsic value in the asset in which you invest. My personal evaluation method is – if there is no real estate involved, I will usually not invest; if the project sponsor doesn’t come through some trusted source and does not have a verifiable track record, I will not invest; I will also not invest if I don’t have a good gut feel (but that is not a primary criteria); if there is no income potential, I will not invest.
Lawsuits are a reality in America. You need to work with an attorney to create an asset protection plan. This ensures that frivolous or malicious lawsuits do not find it easy to target your hard earned wealth. Some people go as far as moving their wealth abroad. I think that might be a bit over the top, but who am I to say that. Again, this is an area of expertise for asset protection attorneys and what I said about estate planning applies here as well.
When your children and grandchildren inherit your hard earned wealth, will they retain and grow it or will they fritter it away? The outcome depends significantly on their experiences with you. A strong education and support through their early life setup will put them on the path. However, the most important thing to prepare the children is to include them through your own wealth building journey. Contextualize and communicate with them as often as possible. The likelihood is high that your children will observe you in action and try to emulate your success.
There are two other ideas that I believe can be very useful:
- Help your kids learn about building a trusted group with whom they can try some of the strategies you are implementing. We’ve often talked about the power of groups in accelerating wealth creation. Your kids need to experience it in action.
- Partner with your kids on financial projects. There is no better teacher than doing something. For instance, buy a rental property with your children fully involved in the process even if you take all the decisions. Again, the experience will be invaluable.
We’ll talk more about these two ideas in future articles.