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.
Being a parent is the hardest and most rewarding job I have ever held. As any parent knows – there are no ‘owners manuals’ out there to guide you on the many decisions large and small you will be faced with as you raise your children. You are essentially equipped with the values you were taught and your own ‘best judgment’ in the heat of any particular moment. At a minimum, well-intentioned parents seek to love their children, feed, house and educate them, and protect them from harm. While this list is benign enough – the truth is that last one can be tricky to navigate. At what point is our role as protector essential (keeping our kids out of physical harm), and at what point is our desire to keep them from harm in the near term sometimes counter-productive in the long term?
While there are certainly times when a parent needs to ‘go to bat’ for their child the powerful instinct to protect our young can get in the way of their healthy development at times. Think of the parent who is still closely monitoring the homework routine of their 10th grader. If that child never learns how to organize work independently nor take the consequences for a failure to ‘get it done’ – they are going to be in for a rude awakening in the real world where folks have to be accountable and responsible on their own. These are often also the parents who ‘fix things’ for their kids, if the child gets into trouble the parent tends to swoop in and make the problem go away.
This pattern can really be a problem in a family business context. For one ting, it can be perpetuated longer if a parent seeks to protect their child from poor feedback, real responsibility or accountability even into their adult roles at the business. The results are almost always poor for the adult child (the interference of a parent on behalf of an adult child rarely makes that child look competent or reliable), can have negative consequences in the business (e.g., if non-family employees get frustrated that this family member is never held accountable and they are left cleaning up the mess), and can create strife in the family or result in a family pulling itself into stronger ‘branch’ thinking if siblings start to intercede on behalf of their kids in ways that are inappropriate.
While it is important to remember that we are family and that shared love and support should guide thinking and decision making – if a parent never allows their child to ‘face the music’ of accountability, they will fail to learn some critical life lessons. Failure and set backs, while never fun, are essential life lessons that build resilience, competence and real confidence, as the person has to dust themselves off and try again. While it can be hard to push our babies out of the nest and watch them fall to the ground – they will never learn to fly on their own, and really blossom into their full potential, if as parents we don’t allow them to experience the set-backs and failures that are a part of life.