Biggie once said “mo money mo problems.” I don’t believe this to be exactly true. Rather than more problems, there are just different problems when more money enters the picture. Many would argue less dire problems, such as, instead of worrying about making rent next month or how to fund your children’s education, worrying about asset protection and estate planning.
When parents discuss raising their kids, they are often quoted saying, “I want better for them, better than what I had.” For people growing up lower class or lower-middle class, I’m sure this is a goal many parents would have for their children. Who wouldn’t want “better” for their kids?
Now let’s reverse roles. There is a parent who was raised lower-middle class, worked hard, got a little lucky, started a business, and now is firmly entrenched in the upper class. Their child grows up to become a teacher, or non-profit employee, or even an accountant or civil engineer. These are all great careers depending on what life and career goals the child has. However, a problem presents itself in that those careers may not provide an income and lifestyle comparable to the upper class lifestyle the entrepreneur parents provided to the child. Why? Because their earning potential, as long as they don’t have entrepreneurial goals, is more or less capped as it is with many W-2 type jobs.
Growing up, the child went on fairly luxurious vacations, always had what they needed and almost always what they wanted, education was always paid for in cash, and they were cast into adulthood at 22 with a college degree and no debt. This is where a potential problem may creep up.
On an entry level teacher or accountant salary, there is most likely not a maid assisting with household chores on a weekly basis. Maybe they never knew that they had to pay for things like car insurance, personal property taxes, or health insurance. The vacations taken from elementary school through high school are no longer attainable with their income. Without financial support from their parents, they might experience some downward economic class movement.
I’m well aware there are far worse problems than moving from upper class to middle class. But these are problems that are persistent. It has been written that 70% of wealthy families lose their wealth by the second generation, and 90% by the third. For the most part it’s not the children’s or grandchildren’s fault, it’s that the parents never taught them the value of money, how hard they had worked, and how lucky they were to obtain it. Money can be a taboo subject, but not discussing it at all can lead to economic and social problems for heirs.
The Vanderbilts were known for blowing through vast sums of wealth through a couple generations. As the wealth was split into slices and distributed to future generations, children were not educated that if they have half the wealth of mom and dad, they can’t spend MORE money than mom and dad did. By the mid 1900’s most of the Vanderbilt wealth was gone, down from $100 million in 1877 (not adjusted for inflation).
Money doesn’t just affect the bank account, it can also cause many social issues as well. Maybe the country club the child grew up attending events at is out of the reach of a average engineer’s salary. The kids they grew up with inherited greater sums of wealth, or entered the family business and are still firmly entrenched in the upper class, and are hard to keep up with.
In the end, rich or poor, discussing money with your children has many more benefits than risks. Even if you aren’t an investing connoisseur, share your money knowledge with your children. Also, share the mistakes you made along your journey, in hopes they don’t make the same.