February 22

Creating Generational Wealth


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A reader asks:

I am 73, my wife is 58 and I have a 15 year old son. We own a small farm and house in Iowa. We also own three properties in Spain where we spend most of the year. We have no debt and are sitting on 2 million in cash, most of it is short term bills. I deal in vintage guitars and will keep doing it as long as I can. We have a great life and are careful with our spending. I would like to have a plan to create generational wealth. Is this possible? Any suggestions?

I love this question because it shows there is no single path to wealth-building.

There are two ways to answer this question.

The first is the financial answer. That involves things like financial planning, estate planning, tax planning, investment management, wills, trusts, etc.

That’s the boring stuff because you can hire experts to help you protect your money. It’s also the easy part of the equation. Plenty of firms can help with the wealth management side of things.

The hard part is the psychological and emotional answer. Generational wealth can screw up the next generation if you’re not careful.

My favorite example of generational wealth gone wrong is the Vanderbilt family.

When Cornelius Vanderbilt died in the late-1800s he was one of the wealthiest men ever to walk the planet. Vanderbilt was a shrewd businessman who understood money could corrupt. Before he passed, Vanderbilt advised his oldest son Billy, “Any fool can make a fortune but it takes a man of brains to hold onto it after it is made.”

The Vanderbilt heirs didn’t take his advice to heart.

I wrote about what happened in Don’t Fall For It:

Just six years after his father had passed away, Billy more than doubled his inheritance through some shrewd business deals and was now sitting on $194 million. Yet even after Billy doubled the family’s money in short order, within 30 years of the death of his father, there wasn’t a single heir or member of the Vanderbilt family who was among the richest people in America. Vanderbilt provided the initial gift to the university that bears his name in Nashville, TN. When 120 members of the family gathered at that university in 1973, not a single one of them was a millionaire.

The first rule of generational wealth is do no harm. The Vanderbilts did a lot of harm to their money, mainly through frivolous spending and terrible investments. They blew through one of the largest family fortunes in history on opulent mansions, yachts and lavish parties.

Although I guess they did give us The Biltmore as a tourist attraction.

Warren Buffett once said, “Give your kids enough so they can do anything but not so much that they’ll do nothing.” It’s a tricky situation, so I think you have to approach this from the perspective of teaching your kids the right values, regardless of how much money they’re going to receive.

Generational wealth isn’t just about passing along a bunch of money to your heirs. Obviously, that’s part of it, but so much more goes into it.

You also have to teach the next generation to make good decisions with money. They need to understand how to spend it, preserve it, and invest it. You have to instill in the next generation a framework for making wise decisions.

It can be difficult to instill the right values when it comes to money if your kids grow up with wealth.

You have to teach them how to be grateful. You have to teach them how to be generous. You have to make sure they don’t grow up spoiled or entitled. And you have to help them understand of the value of money.

True generational wealth requires educating the next generation and providing them the right perspective so they don’t screw it all up.

This question proves there are many ways to build generational wealth. But there are only a few ways to screw it up:

  • Trusting the wrong person or organization with your money.
  • Having unrealistic return expectations.
  • Using an imprudent amount of leverage.
  • Taking on more risk than you need to.
  • Investing in things you don’t understand.
  • Assuming there is a Holy Grail when it comes to investing.
  • Excessive levels of spending.

Envy is more expensive than gratitude so prudent risk management and spending are probably the most important components here. It’s hard to preserve or grow you wealth if you make poor investment decisions and spend more than you earn on those investments.

Building wealth is hard but preserving it can be even harder if your kids don’t understand the value of money.

Raising your children to be good people who make wise decisions is more important than how much money you leave them.

We discussed this question on the latest episode of Ask the Compound:

The original blogfather himself, Barry Ritholtz, joined me again this week to answer questions about Peloton as a going concern, hedging huge gains in individual stocks, how inflation impacts the stock market and finance career advice for recent college grads.

Further Reading:
Don’t Try to Get Rich Twice


Behavioral Finance/Psychology, Personal Finance, Wealth Common Sense

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