First generation, trader; second generation, gentleman; third generation, beggar - Spanish proverb
GenX > GenY > GenZ
There is a belief across the world that the family wealth rarely survives three generations. According to a 25-year survey by the Williams Group family wealth consultancy, published in 2002, approximately 70% of wealthy families lose their wealth by the second generation and an incredible 90%, lose their wealth by the third generation.
One of the major reasons for this is the upbringing of the next generation. Many parents today continue to provide financial support to their adult children, even after they have begun earning their own income, in order to help them maintain a comfortable lifestyle. Nothing wrong in it if it's only done once in a while or when their children are having a tough time financially. But many parents feel some kind of obligation to provide more for their children as they have created enough wealth themselves. This for them becomes the proof of their love towards their children. I have seen instances where parents openly boast about how much wealth they have created and thus their children don't have to do much to live a comfortable life.
Once this becomes the norm, the math stops adding up. Think about it. You are spending at a higher rate than you are earning, which means that your net worth is reducing with time. And the trend is likely to continue in the coming generations as well because of the following two reasons
- GenY develops a habit of spending more than they earn. The fact that they are able to do it without their own efforts will never make them realise the importance of financial discipline, which leads GenZ to follow the same pattern
- GenX does not help GenY realise the importance of skill-building for increasing the family wealth. This prevents GenY from passing on this knowledge to GenZ too
So, what can we do to prevent this? Like every other pattern, we need to break the cycle so that it is not repeated. We can at the least teach the following to our children
- Teach them the importance of building skills. This is the only way to create wealth ethically. As the adage goes, "Give a Man a Fish, and You Feed Him for a Day. Teach a Man To Fish, and You Feed Him for a Lifetime". In today's world, it is easy for children to get lost in the amount of opportunities available. The aim should be to guide them focus towards an area of their interest and help them be in the top 5%.
- Teach them the importance of financial discipline. The rate of spending should always be less than the rate of growth of wealth. They should be able to understand the difference between needs and wants, the earlier they can understand this, the better
- Teach them the basics of investing. Money decreases in value over time, so we should find a way to grow the money we have already earned in addition to earning more. Its really surprising that schools don't teach this important life skill. It is also surprising that most parents themselves lack this skill. Videos and courses of Akshat Shrivastava can be a good starting point, for both parents and children [P.S. - These links are not sponsored]
By doing these, we can at least be happy that we have tried decently enough to break the above pattern of decreasing generational wealth. Only time will tell, how successful we were in accomplishing it and thus help the family lineage prosper for many generations.
Do remember that children learn more by watching us than listening to us.
