Beware of Financial Wealth Destroyers
What are some of the things that can keep your family from being successful in their quest to build cross-generation wealth? Here are a few of them.
Spending more than you earn.
Whether you receive income via personal effort or passive income, one sure way to destroy wealth is to consistently spend more than you earn.
One tempting trap that some people fall into is succumbing to peer pressure. If you live in a nice neighborhood, you are expected to drive a ‘nice’ car and keep your lawn cut and fertilized to neighborhood specifications. Your kids expect to have the same number and quality of toys. Maybe you are expected to entertain the neighbors at frequent intervals. My Mom used to call this “keeping up with the Jone’s”.
If you have ever played Cash Flow 101 – a board game invested by Robert Kiyosaki, you are familiar with the costs of this trap. In the game, you choose a card which tells you what your occupation is. The card lists all of your expenses as well as your income. The cards for occupations such as Lawyer or Doctor have much higher ongoing expenses (bigger houses, more money spent on children and etc), than the cards for occupations such as Teacher.
Another temptation is to use hard earned money to buy luxury goods, such as boats, instead of waiting until your passive income can be used to cover such expenses. I hear people refer to it this as “He who dies with the most toys wins”.
Even lottery winners or other sudden wealth recipient’s must make choices. No matter what your level of wealth you may have enough to buy SOME of the things you always wanted but not ALL of the things you ever wanted.
Another trap which catches many of us is the poor use of credit. Using credit cards is a convenient way to pay for goods and services. However, it can be devastating to carry large balances at the high interest rates the card companies charge. This is another way to spend more than you earn.
Experiencing catastrophic events.
Another set of wealth destroyers – ones typically beyond our control to prevent – include catastrophic events such as bad health issues, accidents, natural disasters and economic impacts such as market downturns or high inflation.
Although we can’t typically control whether or not these events happen to us, we can anticipate the risk of them happening and try to find ways to avoid or mitigate that risk. See our “Protect You and Yours” action item for more information on this.
Having severe family disagreements.
If you aren’t all pulling in the same direction you may have differing life and financial goals than your spouse or your other living family generations. This can cause a disjointed approach to wealth, some family members wanting to spend it, others wanting to grow it, others just not caring.
As noted in our “Protect You and Yours action item, divorce is common and can be a huge destroyer of wealth. Assets usually have to be divided and sometimes investments or other assets have to be sold (often at a loss) in order to be divided. Alimony and child support can be cumbersome (but necessary) ongoing expenses. Lawyer and court costs typically get a big chunk of the marital assets as well.
Managing financial assets poorly.
Each generation must learn the concepts and practices of effectively managing their finances, not only within their own generation, but also across the living (and future unborn) generations.
Some of the wealth destroyers in this area can include:
- Lack of diversification – failure to allocate your resources effectively across asset classes, geographic areas and family generations;
- too much money to advisers at wrong time – using expensive money managers before your investments become complex enough to require them;
- too much risk aversion (or too little) – failure to take on an amount of investment risk appropriate to your level of wealth can result in the inability to grow your finances to keep up with inflation and the needs of expanding members of family in each generation and
- being ineffective when transferring wealth.
Even when you and your family do everything right and are successful in building first generation wealth, large amounts of it can be lost when you transfer it to your next generation.
Keeping wealth across multiple generations is more successful when the family is guided by a 50 or 100 year plan.
The plan can include strategies for allowing the elder generation to lend money to the younger generation so that the time value of money is enhanced while still providing the elders with sufficient cash. It can include strategies to avoid wealth destroying surprises such as the need to spend large amounts of money on long term care for the elder generation by evaluating the need for insurance to cover this risk. It can include strategies to keep the plan current as the family moves through time and unborn generations take control.
Assets are typically taxed when being transferred (estate tax, death tax). Failure to plan for reduction of the taxes can cause wealth destruction.
If family harmony is disrupted – causing squabbles over inheritances – due to lack of family discussion, lack of proper estate plan details being handled or distrust, wealth can be siphoned off by the lawyers and courts while the resolutions are determined.
Finally, the recipients of the assets from the wealth transfer can squander them if the heirs are not properly prepared. Future generations may not realize the value of their inheritance in terms of hours spent earning it. They may feel guilty at receiving unearned wealth and try to get rid of it as fast as they can and they may experience extreme peer pressure to share the assets. Effective wealth transfer allows each generation to be educated on wealth topics and to learn to be part of the wealth building process.