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An Instruction Manual for Generational Wealth

An Instruction Manual for Generational Wealth

What is generational wealth? Generational wealth is the transfer of assets from one generation to another. In the traditional sense, generational wealth includes tangible possessions like cash, properties, businesses, and investments.

The transfer of wealth typically occurs after an individual dies, but wealth can also trickle down to the next generation slowly over time.

Examples of Generational Wealth

Common examples of generational wealth include:

  • Providing money for a downpayment.
  • Funding a child’s tuition.
  • Transferring ownership in a company to a child or grandchild.

Each of these gifts shifts wealth from one generation to the next.

Generational Wealth Moves the Starting Line

You can think of generational wealth like running a relay race. The first runner reaches the finish line by accumulating assets. As they age, or after they die, they pass a baton full of financial resources on to their children. 

Those children don’t start the race from the beginning. They get a head start to the next finish line. In this case, the next racer receives a significant financial advantage over other racers in their generation.

Sounds great, right? It could be, but there could also be a problem. The first person in the race is running towards financial independence. To reach the finish line quickly, they must train for the event. 

The initial racers set a goal to work hard and grow their assets. They spend years planning for this race and use every ounce of discipline, perseverance, and persistence to achieve it. The desire for financial freedom drives them.

The second runner doesn’t have to train for this same race. Once they receive the baton, it’s already full of money. When the older generation reaches the first hand-off point, is there any reason for the race to continue? 

The next generation doesn’t have the same tools to run the race. They haven’t spent a lifetime honing their financial management skills.

If the race towards financial independence is over, what is the second runner racing towards? Will they find a new goal or declare the race complete and stop running?

Seventy percent of wealthy families lose their wealth by the second generation. Ninety percent by the third. Could this be the reason?

Is Generational Wealth a Blessing or a Curse?

Generational wealth can provide a better starting point for those who receive money, but is that gift a blessing or a curse? Will financial gifts improve our children’s lives or make it more challenging for them to desire hard work, development, and growth?

As a parent, I often wonder how my choices are impacting my children. While I can see the impact of today’s decisions, I cannot see the waves that may ripple into the future. If I pass on my wealth to my children, how will it impact them?

If we pass on the fruits of our labor, will they continue running, start a new race, or simply give up?

Including Financial Lessons in Your Generational Wealth Plan

I’m not entirely sure how to help the next generation succeed, but I know it won’t help to drop a giant lump of money in my children’s without any instructions. 

My husband and I started talking about money while my children were very young. We talk about saving money, setting goals, and working hard to achieve them. 

We weave financial lessons into everyday stories for our kids. How do they earn money to pay for the things they want? How do they prioritize their spending? What is a need versus a want?

Then we dig deeper and talk about minimalism. We search through the toy shelves, evaluate their overabundance of toys, and talk about how money can and can’t buy happiness.

Sometimes we share stories about our jobs as software engineers. We discuss the excitement of new projects and working with talented team members, but we don’t always paint a rosy picture. We also tell them about commuting, bad bosses, and artificial deadlines.

The other day we calculated how much it costs to make pizza. Then compared it to the cost of a large pizza at our local pizza shop. We didn’t just talk about the cost of ingredients. We also talked about the impact on our time. 

Sure we could save hundreds of dollars a year, but do we enjoy making pizza? Should we choose to work an extra hour for more money or bake a pie? We let the kids weigh in on these ideas then tell them how we decide.

Talking About the Gifts of Generational Wealth

More than anything, we discuss our goals to save money and the freedom it provides. We tell them how my layoff turned into a blessing and how twelve years of saving our pennies led to my decision to leave a high-paying job.

We can’t tell any of these stories without first stepping through the process of wealth creation. To begin we explain the importance of earning, saving, and investing.

Last but certainly not least, we discuss generational wealth. More specifically, we talk about our parents’ decision to pay for college. We highlight those gifts that provided us with a head start on our financial journey.

The Guidelines for Generational Wealth

I hope these lessons will stick with my children. I want them to understand the importance of financial stability so that they can become good stewards of the money we pass down to them.

Just in case they don’t remember all that we said, I’ve written down a list of instructions for them. Shouldn’t every generation provide an instruction manual to the next generation? 

Here are the guidelines I plan to share with my children:

1 – Understand Your Relationship with Money

I spend a lot of time thinking about money. If you don’t believe me take a look at this blog. It details the story of our wealth creation. 

Money is not just a tangible object to be saved and invested. It has a deeper connection to each of us. It can make you fearful and anxious or provide the confidence to be true to ourselves.

Before you follow any of the next steps you must spend time understanding your relationship with money.

2 – Live Intentionally

It’s easy to waste away your time on this earth. Set goals for yourself and strive to achieve them. Think about yourself five, ten, fifteen, or more years from now. Imagine how happy and passionate you want to feel.

As you make choices and decisions, focus on those objectives. Please don’t allow the distractions of everyday life to interfere with them. Plan ahead, live intentionally, and find a way to become the person you want to become. 

3 – Seek Purpose

Let this money lead you to that place. Don’t squander it needlessly on experiences and objects that don’t enrich your soul.

This money will allow you to avoid becoming a hamster on the hedonic treadmill, but don’t let it interfere with your desire to pursue purpose and value.

4 – Strive to Be a Life-Long Learner

Strive to become a life long learner. The world is a fascinating place, don’t allow yourself to get bored or disenchanted by it. Use this money to ask big questions and search for big answers in life. Spend money on advanced degrees, certifications, or learn new skills. 

Learn to cook, paint, write, draw, or photograph the world around you. Focus on one new skill at a time. If it’s difficult, don’t give up too quickly.

Be intentional with your time. Please don’t waste it staring mindlessly at your phone, laptop, or television, but don’t seek a state of constant business either. Strike a healthy balance between learning, growing, and relaxing. It’s easy to get burned out in the pursuit of more extraordinary things.

5 – Spend Money on Your Health

Spend this money to make your body healthy and strong. As someone with chronic pain and illness, I understand this more than most. Use this money on gym memberships, surfboards, and bicycles. When you go to the grocery store, buy quality food even if it costs a little more to do so.

While caring for your body, don’t forget to care for your mind. Practice meditation and search for a qualified therapist if you are struggling emotionally.

Never put off a doctor’s visit. Use this money to pay for additional testing or second opinions whenever you should need it. I wish the leaders of our country would create universal health care. Until they do so, use this money to pay for the best medical care you can find.

Remember that modern medicine is not always the best option. Doctors often push pills as solutions to problems that acupuncture and alternative medicine can resolve. Seek out alternative therapies alongside traditional ones.

6 – Be Brave and Bold

Be bold and brave when you venture into the world, even when it feels scary. If you have an idea for a business or product, figure out how to bring it to fruition. Look for leaders in your industry, and don’t be afraid to reach out to them for guidance.

Think about the early entrepreneurial skills you learned through your lemonade stands, but venture carefully into new businesses. Please don’t allow others to sway you to spend money and don’t contribute to someone else’s ideas unless you fully understand their mission and views.

7 – Give Back to Those Who Need It

Remember this gift. The rest of the world will not be as lucky and privileged as you are to receive it. Give back to those in need by sharing your time and financial resources. Search for causes that are important to you and donate to them.

8 – Stay Kind and Grounded

Please don’t use this money as a way to act more important than those around you. We practiced stealth wealth throughout our lives, and I hope you will be modest about this money. 

Aim to be a decent human being to everyone you meet regardless of how much they make or own. Stay kind and grounded. Never act entitled.

9 – Grow This Gift

I hope you will grow this gift. It’s easy to spend this money on whatever you see fit, but I hope you will learn to cultivate it instead. The best part of financial independence is paying the bills without stress or worry.

Now that your mind is free from financial worries, what will you do with that time?

How Much Generational Wealth Should We Provide?

Warren Buffet once said, “You should leave your children enough so they can do anything, but not enough so they can do nothing.” That’s exactly how I feel. Now, how much is that? I’m not sure.

Until this point, I’ve discussed generational wealth as tangible assets that can be passed from one generation to the next. But the true value of one’s legacy is much more than the money.

It is the wealth of knowledge, kindness, and compassion we provide to those we know and love. We can ever give enough of those.

Chris

Monday 15th of February 2021

Thanks for this article. I had not really thought about generational wealth being some of the small, mundane things we have done for our kids and my folks had done for us. Things like helping to pay for a first car, a few thousand dollars to pay closing costs for a first home, etc. Of course, college is neither small, nor mundane, but we felt it was so important they got an education that we made major investments in their undergraduate degrees. Now that they are both on their own, we feel the best thing we can do for them is to be self-sufficient as we age, so we are not a financial burden to them. We are hopeful that as we age, we may be in the position to gift small annual sums to them, as my spouse’s parents have done once they turned 80. A few thousand dollars can make a huge difference if it is given at the right time, and the recipient uses it for something that improves their situation, like mortgage payoff.

One Frugal Girl

Monday 15th of February 2021

Hi Chris, Thank you for your comment. I considered the big expenses, but I hadn't thought about gifting small amounts of money over time. You've given me new ideas to consider.

Javi

Monday 15th of February 2021

Thank you for this article. Currently, my wife is pregnant and we often discuss about the best way to manage money issues and parenting. I was really inspired by your instruction manual to the next generation as it touches all the important little keys in order to raise our kid on purpose.

One Frugal Girl

Monday 15th of February 2021

Thank you for your comment and congratulations on your pregnancy! I'm glad you found this helpful.

Steveark

Sunday 14th of February 2021

My parents left me and my brother a million each. But we were already self made millionaires when we got it so it hardly moved the needle. I'll leave each of my three kids much more than that, but I doubt it will be life changing. Inheritances happen when you are pushing 60, that's simple math, it's set in stone, and a million or three at 60 can't change your life. It's too late. I just don't think inheritances are ever life changing. And that's a good thing.

One Frugal Girl

Monday 15th of February 2021

I hope my husband and I live a long healthy life so that my kids are also much older when they receive our inheritance. I do plan to help them out financially before we die though. For instance, paying for their college education if they don't qualify for scholarships.

Mistress of Home and Finance

Sunday 14th of February 2021

One of the practical things about generational wealth I saw my mother put into practise is to avoid a windfall of cash that falls on us kids. Some people, like my sibling, will let cash trickle out of their fingers like grains of sand cast to the wind. Instead my mom gave us a workload in the form of real estate which we had to learn to manage. Ensuring your kids need to work for their gift is important -- that quote about "doing anything, but not nothing" is one my mom espoused. Thanks for this post!

One Frugal Girl

Sunday 14th of February 2021

That's a great way to transfer wealth if your kids are interested in this type of management. Thank you for the comment.

Tim Griesdorn

Sunday 14th of February 2021

Thanks for this article. I know many families struggle with this issue. It is so sad to see the intergenerational wealth disappear after three generations. One thing that could have been mentioned is the concept of a family bank. It allows your children options for starting new businesses or getting a house or education and repaying that amount back so future generations have the money to do the same. I also like the idea of dynasty trusts for the education or service experience like missions.

A great book and movie about this is the Ultimate Gift.

One Frugal Girl

Sunday 14th of February 2021

Thank you for this comment. These are excellent ideas.