My family has done better than the Vanderbilts. How can that be? Few have ever heard of us and Cornelius Vanderbilt grew up poor but eventually amassed a fortune that today would be valued at over $200 billion. So how can I surmise that my family has done “better” than that fabled wealthy family? I will qualify my statement with the fact I think my family has done better at amassing wealth across the generations than the Vanderbilts have and in this post I will try to understand why.
The first thing you should know is that the Vanderbilt family eventually squandered much of the money that was left to them. From the book “Fortune’s Children: The Fall of the House of Vanderbilt” the author writes:
“This fabled golden era, this special world of luxury and privilege that the Vanderbilts created, lasted but a brief moment. Within thirty years after the death of the Commodore Vanderbilt in 1877, no member of his family was among the richest people in the United States…. When 120 of the Commodore’s descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them.”
How can a fortune so large be squandered so quickly? The simple answer is that well, the kids and grandkids spent it. There is a famous saying across different cultures about losing wealth within 3 generations. In British or American culture it goes “Shirtsleeves to shirtsleeves in 3 generations.” A Chinese proverb says “Rice paddy to rice paddy in 3 generations.” Even the Bible has stories of progeny squandering the wealth amassed by families, the tale is as old as time.
In fact, this phenomenon has even been studied and documented to some degree. A study by the Williams Group wealth consultancy found that 70% of wealthy families lose their wealth by the second generation and 90% lose it by the third generation. This seems completely counterintuitive to all the posts I have been making and fuss that is in the media, about the inequality we are experiencing now in terms of net worth and income. It doesn’t speak to the narrative that loopholes in inheritance tax are allowing a permanent upper class to calcify at the expense of us that toil away all day making other wealthy.
There is even more to back up the notion of the rise and fall of wealthy families. 70% of family owned businesses fail or are sold within the second generation and 86% of all millionaires are first generation millionaires. Clearly we as a society either don’t know how to pass those same accumulation skills into the next generation, we are just terrible at doing it or it could be a little of both.
Rather than just shame people into pointing out bad habits that lead to the next generation squandering money, I want to focus on that 10%. For those that kept the wealth going, what did they do? What did they not do? And what habits or practices did they pass on which kept the wealth in the family?
Wealth as a Habit and Mindset
The University of Michigan published a study that came to a similar but had a bit of a twist: it tried to measure the factors that contributed the most to preserving wealth in those families that did end up maintaining their wealth across the generations. The factors they found may be surprising to some and some may seem obvious but they all had one thing in common: they came early in life.
Education – In the study, education, specifically higher education contributed 25% of the similarity in wealth between parents and children. I have pointed to this important factor before. Despite the many famous examples of college dropouts that became wealthy, this is not the norm. The overwhelming majority of wealthy people have a college degree. Higher education, even if it’s content is not valuable, is a powerful social signal in our society whether you like it or not. It projects a degree of cognitive ability, consistency and to some extent conformity. All skills that employers value when placing people in high paying roles.
Housing – Housing accounted for 28% of the similarity between wealth in one generation and the next. This wasn’t qualified by whether some parents helped their children attain a first home or not but it’s likely that if they do t they can at the very least guide children when purchasing. Purchasing in the right area, not purchasing too much house and having a stable job to be able to take out a mortgage are just a few of the characteristics of home owning that are conducive to acquiring and maintaining wealth. The leverage that is allowed also helps. There aren’t many assets that you can leverage by 80%, this can turn a boring 4% annual return into a 20% annual return just by living your life and paying your mortgage.
Marriage – Regular readers of this blog know how important this can be. Despite what Disney would have you believe marriage is still an economic union of two people and love doesn’t always trump financial habits. Divorce is expensive, especially a divorce that takes place after many years of marriage. Depending on how contentious the process is, it can eat away wealth with lawyer and court fees in addition to any settlement. Apart from the negative shock of divorce, marriage also allows people to share costs of housing, children or other big ticket items. Maintaining g a marriage for a long time also speaks to financial communication which is key to having financial goals both partners agree upon. This trait by wealthy children accounted for 14% of the similarity between them and their parents.
My Own Take
However, if being educated, owning a house and being or staying married are all keys to maintaining wealth across generations, many more people should still be able to maintain wealth across generations and not just 10% of them across 3. In this sense I can try to add my own personal experience based on my own situation and what I have witnessed in other nuclear families within my extended family that have had success across generations.
Opportunity – First of all it goes without saying that previous generations were fortunate enough to either overcome discrimination or not experience it to as severe a degree as other people in order to attain their wealth. Historically many ethnicities have been purposely excluded from opportunity and economic empowerment in American society. Many may argue this is still the case. Even if it is, I still believe that now there is the opportunity for almost anyone with the will to do so, to succeed. There is less discrimination and more free information available than there has been in the past, the will to succeed in this area however, has to be strong and unwavering to be able to realize opportunities.
Where and Who You Live With – I was struck by a sociological study I read way back which purported to find that those that grew up feeling wealthier than those around them ended up being less materialistic and social climbing later in life. This was despite the income level of the area which they grew up in.
For example if you grew up in a middle class area but felt much richer than everyone else, you usually ended up being less materialistic later in life. In other words, these people were much less likely to be bitten by the keeping up with the Joneses bug. More willing not care what type of house they lived in, car they drove or brands they wore. Interesting enough, the study found this was true for people at all income levels but the ex factor was whether they felt wealthy to those around them. Even if they grew up poor as compared to people in the US as a whole, if they felt wealthier than those around them they still ended up leas materialistic.
I wouldn’t say this is a hard and fast rule but it definitely spoke to my experience and what I have seen. I lived a relatively middle class upbringing but felt well off with parents that owned a home and owned 2 cars as compared to people who rented and rode the bus. I often didn’t want to convey this situation in social settings so as to avoid being singled out as the “rich kid” or to make people feel bad about their own situation. I had what I needed and to this day don’t feel the need for much more in terms of material things. This leads me into my other observation.
Not Caring What Others Think & Frugality – Frugality I believe is instilled through communication early. Teaching that there are limited financial resources and decisions have to be made on how those resources are allocated is really important to instilling financial discipline. Retirement is probably more important than the new cool shoes. Developing discipline for this vision and the confidence to be able to achieve it are started early. These decisions are also not very socially popular sometimes, what is in your own long term interest is not really that “cool” for today and many may cave to the desire to feel good now through the short term high of social acceptance from others.
There is also an element of learned confidence to making choices that many others don’t. I see many children of wealthy people chasing status or approval from others even more wealthy than they are, but these habits aren’t what made their parents wealthy in the first place. Those were likely working hard, educating one’s self, taking measured risks and knowing the value of money. Nowhere in the equation does social climbing and status come into it. In fact these may be negatives for wealth generation and preservation for many people in the long run.
As discussed in books like The Millionaire Next Door who is actually wealthy in America tends to differ greatly from who is perceived to be wealthy. Being secure in who you are, not having to prove anything to anyone nor gloat about what you do make or save is a huge wealth preserving asset. It keeps you from making rash emotional money decisions with the approval of others in mind. It’s one reason I think many in my family have been able to quietly maintain their own wealth without much of anyone noticing.
Education – Yes it’s not necessary to be rich and yes you may not learn anything in college but the fact is, college is an easy spring board to a decent wealth generating job. Education was the number one priority in all those that maintained wealth across generations that I have seen, no exceptions. Even those who didn’t attend college sure as hell made sure their kids did. I’m not going to write a long rant on this one, it’s just not up for debate really.
Believing Your Kids Shouldn’t Struggle – This may be the most common mistake I see parents make. Struggling is a part of life, no matter how good you try to make it for your offspring, they will struggle in ways you can’t even start to imagine. Rather than trying to project our own struggle into them and then protect them from it, it may be better to acknowledge that struggle will happen and start to teach them how to cope with it and overcome it. The best motivation for kids may not be in what you give them but what you inspire them to do. This is probably one of the toughest things for many modern parents to do because we can offer them so much. But just because we can give our kids the world doesn’t mean we should. You don’t value anything that’s given to you without working for it, money works the same way in this sense.
So there you have it, my take on what may help keep your family wealthy. The other option that a colleague I spoke with was to “just spend it all” given that the kids weren’t likely to maintain it, which made me chuckle. No matter what you do just remember, perception when it comes to wealth and money is not always reality.
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