Recent data suggests that 70% of generational transfers of wealth fail. What does that mean? That means that most of the time the wealth that you spend your entire life creating, growing, and preserving will be gone to the wind a few short years after your death.
Why? There are a multitude of contributing factors resulting in the loss of wealth after an inheritance. Failure to properly plan for the orderly transfer of your estate is a big one. You’d be surprised to know how many people never bother to write a will or create a trust. A result of this is can be an avalanche of estate taxes, fighting among heirs, and legal fees out the wazzoo.
Uncontrolled spending is almost a cliche, but it’s still incredibly common. The concept of living off the dividend income of a lump sum just never occurs to people, much less simply not touching the principal or interest and letting it grow.
The bottom line is that the potholes people hit when they inherit assets or cash seem to be as numerous as unique as each person on the planet, but in reality they tend to be recognizable and predictable.
So the question is: how do you avoid them? I have 5 suggestions to help you do what very few families seem to be able to do, namely, pass on wealth to the next generation successfully and productively. Remember, only 30% of families master this task, and even fewer hand off substantially the same amount of money or assets to the third generation. That’s the real hat trick, and that’s where Old Money really begins.
But you’re ready to be an OMG (Old Money Guy or Old Money Gal). Half of getting there is preparation. Here’s the short list of concepts to get your pretty little head around:
- The Importance of Financial Literacy. You must have a fundamental understanding of how money works. You have to understand why credit card debt is a bad idea. You should have a budget and a savings plan. You should consider your insurance needs and plan for the future. Furthermore, you must educate your children so they understand these same fundamentals. Why? Because you’re going to hand the (money) ball off to them at a certain point in time in the future. It needs to be in competent hands. Planning is not just for the very rich: planning often makes one very rich. Note: you may have advisers, but you never simply hand off your financial affairs to an “expert”. It’s your money; it’s your business. You can never know everything about investments, but you should have a grasp on the fundamentals.
- The Role of Money. You and your children need to understand the role of money. You need to know what it can and cannot do. Money is not something to show off with or brag about. It is not something to use as you try to control others. It is something that, used properly, can provide you and your family a certain measure of security. More importantly, it is possible that money can provide you with options: do you want to get an education? Travel? Pursue something creative? Live abroad? Money, properly managed and intelligently used, can help you do that. Notice I have not said, nor will I ever say, Money can help you buy that. You don’t want to buy things; you want options and opportunities to do things.
- The Nobility of Work. No matter how rich you are, you work. Your children go to school, graduate, and go to work. There’s no living off the fat of the land. There’s only honoring your ancestors with effort and vision. Work does several important things: it contributes to self esteem, independent of money; it gives meaning to life; it teaches the life lesson that work is what creates wealth; and, most pragmatically, it preserves existing capital and assets by encouraging heirs to live off of what they earn, not what they’ve been given.
- The Power of Unity. The family unit is the most important element in upward mobility and in preserving what you’ve accumulated and accomplished. The members of your family need to understand that you have goals and dreams for the future, and that includes their dreams and their future. When everybody gets on the same page, it’s amazing what can be accomplished. Make plans, take action, be supportive, and celebrate when you reach your goals.
- The Necessity of Values. You have to articulate and adopt certain Core Values for yourself and your family. You have to communicate those values to your children. (I talk about these Core Values in The Old Money Book.) The bad news is that your children will probably ignore most of what you say. The good news is that your children will probably watch everything you do. This should give you an idea of how to communicate your values, i.e., walk the walk before you talk the talk. If you properly instill these common-sense values in your children by setting a good example, you have a chance that they will be good steward of whatever legacy you leave them. If you don’t, they probably won’t.
- BGT
Again, well said, Byron. I specifically liked the part of how children will ignore what you say but will still watch what you do. So true. There is hope…………..
Thank you, Bev. – BGT
Excellent post and once again right on point. You need to take this show on the road! This is a message that needs to get out there.
Thank you, SM. I’ll be expanding some platforms in the next few weeks. Your support is greatly appreciated. – BGT
Byron, I really enjoyed your old money book and have learned alot from it. But I have one question: you seem to indicate that using credit cards is a bad idea. Could you tell me if this is true and why you think this. Don’t old money people use credit cards for convenience but pay the balance in full each month.
Thanks for your teaching.
Thank you, Mark, for your kind words about the book. I’m glad you enjoyed it and found it helpful.
There are people who can use a credit card, spend wisely, and pay it off at the end of the month. They are rare. Amy, who contributes here regularly with insightful comments, is one of those OMG’s (Old Money Gals) who can do this and be fine. But her spending habits are seriously spartan and ingrained, as she was raised in an Old Money household. So, for most people, I do suggest not using a credit card except for emergencies. It’s too easy to leave the balance to carry over “just this once” and never pay it off.
Furthermore, several studies have shown that people who spend cash spend less than those who use credit cards. It’s real currency leaving your hands in real time, not an abstract amount on a receipt that you’ll see on a bill thirty days later.
Plastic is convenient, but there’s nothing like cash. A couple of years ago, I was in a grocery store. Their credit card readers went down. For a period of time, the store could only accept cash. A few cash-carrying shoppers, myself included, strolled to the front of the line, whipped out some currency, bagged our groceries, and went on our way. Those with only credit cards were left, very unhappy, to wait for technology to correct itself.
Cash is also private, as a friend of mine learned recently when he was audited by the Internal Revenue Service. He’d done nothing wrong, but he had to bring all his credit card and bank statements to a hearing. The examiner was free to review all of his purchases for that tax year, whether or not they were relevant to the tax issue at hand. Some things to think about.
– BGT
byron, thanks for your insight on credit cards. What do you think about using debit cards since some kind of card is usually needed to reserve tickets, hotels, rent cars etc. Maybe someday you could write a book about how old money manages their money. I have gone to using checks and cash to pay expenses but find that sometimes a debit card is needed. What are your thoughts. Thank you again for your insight.
Mark, thank you for the comment. Amy’s response is on target: it’s not credit cards; it’s credit card debt. I recently heard a doctor say that the best exercise you can do is the one you’ll do on a regular basis. Credit card debt is like that: the best way to avoid it is the way that you, personally, will avoid it. If that’s not using a card at all, or at a minimum, great. If that’s using it often but not carrying a balance, just as well.
Be honest with yourself and act accordingly. Amy does it when she pays her balance off at the end of each month. I do it my not having a balance at the end of each month.
Thank you, Amy. And thanks again, Mark. – BGT
Mark, I happen to know something about this. Using a debit card for tickets and hotels should be fine, but renting a car with a debit card could be a problem. The card will have to have a Visa or MasterCard logo and be linked to your bank account. Car rental companies will not accept prepaid debit cards. You will be required to put down a deposit and buy insurance from the rental car company even if your own car insurance covers rental vehicles. They will check your credit score, verify your identification, check your insurance and probably call your bank. If there is a problem with any of these, they may not rent the car to you. Even if there is no problem, all of this will take some time. Finally, they will probably give you the cheapest car they have and tell you its the only one available.
The problem isn’t credit cards, its credit card debt. As Byron has previously pointed out in this blog, the interest rates charged by credit card companies on revolving debt are some of the highest allowed by law. But that only applies to debt that you carry over from month to month. If you pay the balance in full every month, you won’t pay any interest. In my opinion its a good idea to carry a credit card “just in case”. You don’t have to use it much, but its there if you need it.
Thank you, Amy. Well said. – BGT