The theme this week on the One Minute Retirement Tip podcast is: Why Do Family Fortunes Disappear?

Today, I’m talking about some of the most common reasons why 90% of wealth is gone after the 3rd generation. The old adage “shirtsleeves to shirtsleeves in 3 generations” is true for the vast majority of wealth. 

It’s why most millionaires alive today are self-made and did not inherit their fortune. You may have some assumptions about why wealth is lost, so let’s explore the often complicated reasons why wealth doesn’t stay in the family for more than a couple generations: 

Unfortunately, most of it comes down to the values and priorities of both the earners of the fortunes and the next generations they pass the money to. 

Lack of communication is perhaps the biggest issue. Most wealthy families do not talk to their kids about money. They do not set expectations or boundaries on how their children should handle money. They rarely think twice about giving their kids the best vacations, the best clothes, etc. Children of wealthy parents almost never have to work for what they have, so their values and experience with money is vastly different from their parents who often had to sacrifice much to build their wealth. If there’s a family business, children are not involved early and they know next to nothing about the values that brought about success with money and in the family business in the first place. Children of self-made millionaires aren’t taught how to invest or how to manage money prudently. For them, money is easy to access and is available to fund whatever, whenever, so children grow up with instant gratification with money and not much appreciation for connecting the dots between work and money. 

Because they’ve lived the easy life in terms of money, they usually don’t develop the skills to be prudent with money, invest wisely, etc. They spend more than they save, they know next to nothing about basic investment principles, personal finance, and how compound interest works. Patience with investing does not come easily to the 2nd generation wealthy individual, and they often make big investment blunders because they don’t know the dangers of debt or they can’t analyze the risk/return tradeoffs. No one has ever told them that a 7% return on your money is worthwhile. 

Of course, I’m making some broad generalizations here. There are exceptions to this, and when you see exceptions to this - when children grow up developing the same values that brought about the creation of wealth, they are more likely to think of themselves as stewards of the family wealth, vs. owners.

There are plenty of other reasons why wealth doesn’t last beyond 3 generations, including the natural dilution of wealth as it transfers to the next generations (which I’ll talk more about tomorrow), but much of it comes down to the fact that the most important money values that predict financial success are not transferred well to subsequent generations. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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