by John Ward
That wealthy parents beget wealthy heirs is well researched and proven. In fact, parents in the top quintile of wealth and the bottom quintile are very likely to have children of the same wealth category through their adult years. The top fifth has one year’s earnings of net worth; the bottom fifth has but six weeks of net worth. Curiously, the gap is the same in Sweden – the land of perceived equality – and the USA – the land of perceived inequality.
But, until now, there hasn’t been a study explaining exactly why that’s true[i]. There are theories that the next generation inherits a leg up and those that believe the next generation learns certain approaches to money.
What do you think?
- Kids of parents of wealth earn more in their lifetime.
- The next generation creates wealth by investing in homes – as their parents did.
- Kids from wealth learn to do riskier and higher return investing – just like their parents do.
- The next generation benefits from inheritance bequests.
- The next generation benefits from lifetime financial gifts from their parents.
- The next generation follows the lead of their parents with better education.
- The heirs learn to save more money from their parents.
1, 2, 3, and 4 are true in that order of influence. 5, 6, and 7 have no influence on children’s wealth accumulation. Purchasing homes sooner and investing in high return ways are the two most discriminating factors of heirs of wealth. In conclusion, what’s learned at home about how to manage money is more important than the passing of wealth from one generation to the next. (Unfortunately the same holds true for the poorest of the next generation.) Parental example is what really matters.
[i] Now there is, by researchers Peter Lundgren of Stockholm School, Thomas Jansson of Sveriges Riksbank, and Todd Sani of the Wharton School.