How the Wealthiest Families Make and Lose their Money

September 27, 2017

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As a teen, the pinnacle of wealth to me was belonging to the local country club. I knew that my family was far from affording membership to that club, so I assumed everyone who had money belonged there. In my opinion at the time, that was the ultimate status symbol.

I had built up this county club in my mind after I had attended a friend’s 16th birthday party there. It was reminiscent of the show My Super Sweet Sixteen on MTV, as it was over the top. We dressed up like it was prom. The guys rented fancy tuxes, and the girls wore expensive dresses. The party included catered food, dancing, lavish decorations, and to cap it off, a brand new car with a red bow on it for the birthday boy.

My 16th birthday was very different. I’m sure many of you can relate. I remember thinking to myself, I wonder how this guy’s wedding will be if his 16th birthday is so extravagant. His parents must have spent a fortune on that one event.

Second Generation Wealth

There was no doubt that my friend came from a very wealthy family. The real question though is how much of his parent’s money will he (the second generation) inherit?

When you think of wealth passing from family-to-family, you might think of the Rockefellers, the Kennedys, or even the Fords. What you may not know is that evidence suggests that these families are the exception rather than the rule.

Where Does Wealth Originate?

According to some studies, only 5% of wealthy families inherited their money. In turn, 70% of wealthy families earn their money through business ownership. The remaining 25% of wealth is generated by high-income professions such as entertainers, doctors and attorneys.

Why isn’t more wealth passed down from older generations?

First, Second, and Third Generations

According to the Williams Group, 70% of wealthy families lose their wealth by the 2nd generation, and 90% lose their wealth by the 3rd generation.

The saying is: “The first generation makes it, the second generation spends it, and the third generation blows it.”

According to Time, “It takes the average recipient of an inheritance 19 days until they buy a new car.”

If you think that this is a new phenomenon, it’s not. Look back at the Biblical parable of the prodigal son who squandered his early inheritance. Human nature hasn’t changed much in 2,000 years. Sometimes generations still struggle to handle wealth properly.

Russ Prince, president of R.A. Prince & Associates, says, “The people who created the wealth were often obsessive…but their kids were not hungry.”

This makes sense. Oftentimes, the second and third generations come from more materialistic, comfortable upbringings, which are usually much different than that of the first generation’s experiences.

The Vanderbilts

One of the most famous examples of this is the Vanderbilt family. Cornelius Vanderbilt amassed a fortune with railroads and shipping during the 1800s. He grew up poor with a limited education. At the time of his death, his net worth, in today’s dollar valuation, was $215 billion. This valuation dwarfs that of Bill Gates, the richest man in the world today, who has a $86 billion fortune.

With a fortune like that, you would expect all of Vanderbilt’s heirs to be set for the rest of their lives. His children and his grandchildren lived lavish lives. They built large mansions around the United States, but they did little else to preserve their fortune. According to Michael Klepper and Robert Gunther, who wrote the book The Wealthy 100, in the 1970s, the Vanderbilt family held a reunion with 120 family members attending. Not one member of the family was a millionaire among them.

Jesse O’Neill, author of The Golden Ghetto: The Psychology of Affluence, says “Psychologists specializing in ‘sudden wealth syndrome’ acknowledge that heirs, like lottery winners, tend to blow their windfall…they lack purpose, self-esteem and the ability to delay gratification.”

Providing a Sustainable Inheritance

“Families need to take their time to shape their attitudes toward wealth,” according to Nathan Dungan, from the family wealth consultant group, Share Save Spend. “It needs to go beyond maximizing returns and reducing taxes.”

The financial disciplines of the parents are not always inherited by the next generation. It’s important for families to communicate their values and legacy goals. Otherwise, the aggregate wealth of the family will decline over time. Thus the saying: Shirtsleeves to shirtsleeves in three generations will come true.

My Sweet 16 Friend’s Current Situation

You may wonder- what is my wealthy high school peer up to these days?

Since I’m friends with him on Facebook, I get to learn what’s going on in his life from time to time when he posts online. He bounced in and out of several colleges before finally landing in Europe. In Europe, he worked within the fashion industry, but even that was somewhat open for interpretation. Later, he got married in Milan and had an upscale wedding out there. Sadly, I was not invited to that event. 😉

By the lifestyle that him and his wife lead, I have to make the assumption that they have a nicely funded trust, since I’m not sure either of them work. As an outside observer, they may fall into the 70% statistic in which inheritors spend all of their wealth in the second generation.

So readers, do you know any wealth families that blew through all their money? How would you encourage those with wealth to maintain it? Share your thoughts below.