How the Wealthiest Families Make and Lose their Money



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.  


wealthy lose wealth moneyWith 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.  


wealthy lose wealth moneyJesse 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.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.


    • Thanks for sharing Jeff!!! It’s interesting that I honestly don’t know that many families with family businesses but a lot of kids with trust funds. I guess it’s just based on where I live.

  1. I can relate to your 16th bday. I think it was just like every other day in my life. I think I got some bday wishes from my family.

    I think it’d fascinating that some families have done so well financially and left their fortune to their offspring which unfortunately didn’t last very long in many cases.

    Sometimes I wish my family were wealthy, but it’s not the case, so I’m back to my 9-5 job hehe.
    Ms. Frugal Asian Finance recently posted…3 Frugal Bloggers Turned Millionaires OvernightMy Profile

    • In many ways I’m glad that my parents weren’t super wealthy where I didn’t have to work. I definitely would have been super lazy and probably a lot like Billy Madison 🙂

  2. I knew some well to do kids that were second generation of parents decent size businesses growing up, but no one who I’d say was outright wealthy. Most of them have yet to inherit and some of their parents businesses have already faltered. Sadly most of them seem to have banked on the family business. Since they won’t inherit what no longer exists I would suspect they are not doing so hot. In college I met some wealthy kids that made their own way with unique careers. Conversely these folks are doing just fine. Moral: even if your last name is gates it’s better to count on the money once you have it, not that you might inherit it someday.
    FullTimeFinance recently posted…What To Do About A Lost or Stolen WalletMy Profile

    • It’s definitely interesting to see how some children utilize wealth to build names for themselves while others are content to live off their parents legacies. Seems like the money can be a blessing and a curse if you’re not prepared.

  3. I am a strong believer of passing on the knowledge to generate wealth for the next generation rather than give them the wealth. Give a person a fish, you feed that person for a day. The next day, that person will come back and ask you for another fish. If you teach that person to fish, you feed that person for life.

    I will give my kids a fishing rod, some great lures and show them the fishing hotspots, but I will give them no fish. They have to catch their own fish.

    Finally, if they also teach their kids how to fish, then I will be the proudest father in the whole world.
    Leo T. Ly @ recently posted…12 Personal Financial Questions That Everyone Should KnowMy Profile

    • When I was younger I wanted to give me kiddos everything to set up their life to be as easy as possible. As I’ve gotten older I’ve seen some of the folly of my ways. I’d like to help my kids out as much as possible with education but we’ll have to re-evaluate down the road how much more makes sense 🙂

  4. This remind me of the old saying…

    “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.”

    I plan to leave an inheritance to my two adult sons, but not enough that they could live off of. Instead, Mrs. FF and I did our best to teach them the right things about frugality, saving, and investing. So far this seems to be working, but the final verdict is still out.

    I don’t know any wealthy family stories directly, but I do remember reading that Bill Gate’s grandfather left him a million dollars. Bill refused to touch that money to start Microsoft. That tells you a lot about his character and attitude towards money.
    Mr. Freaky Frugal recently posted…Investing attitudeMy Profile

    • Wow I had no idea that Bill Gates was left a million dollars and never touched it. That’s a really fun fact and definitely speaks of his character. Thanks for sharing!!!

  5. This makes a lot of sense. The traits that allow you to build wealth are difficult to develop if you’ve never had a need to build wealth. I’d also imagine you start pretty high up on the hedonic treadmill, which can’t help things.

    I would hope that no matter how wealthy I became I would not throw crazy parties like that for my kids. I’m sure with a lot of wealth it is tough to find the balance between keeping your kids happy and comfortable and keeping them grounded and humble, but it seems like some parents don’t even try.
    Matt @ Optimize Your Life recently posted…Getting Better Results in Less TimeMy Profile

    • I think at some point it’s easier to give in than fight with your kids over things. If you have the money and your kids know you do. I’m sure at some point there is pressure and probably a ton more pressure if their peers are throwing big blow outs.

  6. It is sad that parents who “make it” want to give their kids everything they missed growing up…and in so doing, damn that next generation from ever learning the most important skills and lessons that created the wealth in the first place. Successful generational wealth transfer seems to be the hardest task to pull off, and only one weak link puts you back to where you started. Perhaps the family blog archives will be a new dynamic going forward to capture the wisdom of your ancestors 🙂
    Paul recently posted…There Are No Plans for Your MuseumMy Profile

  7. I like Warren Buffett’s plan to leave “enough that they can do anything, but not enough that they can do nothing” to his heirs.

    My wife and I have actually told our daughter to expect nothing. If we spend our last penny when we’re 100, we’ll be good with that. 🙂 Better for our daughter to earn her own way.
    Brad – recently posted…3 Super-Simple DIY PortfoliosMy Profile

  8. Kind of reminds of the study that was done with monkeys. A group of researchers introduced currency to monkeys by giving them coins and exchanging them for food when the monkey gave the coin back. What’s the first thing these monkey’s did with this new found currency in their community? Prostitution…

    Yeah, we have a knack of blowing money that is given to us. Luckily this isn’t something pursuers of financial freedom struggle with.
    Money Miser recently posted…Live Within Your Means, Then Below Them, Then Expand ThemMy Profile

  9. It’s unfortunate, in a way, that inheritors of wealth are so likely to squander it, but it’s hard to truly learn how to earn your own way if you don’t “have to” do it. According to some statistics I read awhile back, Baby Boomers are less likely to leave their children an inheritance than the generation before, so it looks like more people will have to generate their own wealth.
    Gary @ Super Saving Tips recently posted…Are You Ready for Free National Coffee Day 2017?My Profile

    • That’s really interesting to read. I would have thought that Baby Boomers would leave more but clearly they are spending their inheritance and then some. Thanks for sharing!!!

  10. IIIIIInteresting. It’s kind of sad that so much hard work and wealth is squandered; I’m sure many of us would kill to inherit money. But maybe there’s beauty in having to work for the lives we want? After all, we aren’t blowing money on things because we see its value to give us freedom.
    Mrs. Picky Pincher recently posted…My Favorite Money Bloggers, Part 4My Profile

    • I totally agree with you Mrs. Picky Pincher!!! It’s super easy to spend other people’s money but a lot harder when it’s your own. I think that’s why people are so “free” to spend big money on a new car with three weeks of receiving an inheritance 🙂

  11. It is a sad state for those families that 2nd and 3rd generational wealth is mostly squandered by heirs. The upside is that there money gets spent on goods and services that produce profit for companies and jobs for their employees. One of the arguments against tax cuts for the “wealthy” is that it gets saved, not spent and does not benefit economic growth. Not so it appears with wealthy heirs that have access to that money.
    Tom @ Dividends Diversify recently posted…The Lights Are On And Someone Is HomeMy Profile

    • From what I’ve read it seems like a lot of wealthy families seem to spend a lot of money. Now with instagram and facebook I would think people would really want to show off. Further depleting their cash and energizing the economy 🙂

  12. Being from rural Wisconsin I don’t know any wealthy families. There were a lot of farmers that sold their land for housing developments but I’m not sure what happened to the families.

    I worry about what happens with my kids after the wife and I bite it. I hope we can instill second generation FIRE in them.

    • With how hard you and your wife work I’m sure they will definitely keep some of your traits. It’s hard not to when that’s what your kids see day in and day out 🙂

    • Thanks for sharing Jason!!! I saw a really nice BMW today and for a slight second I had envy. I then thought I don’t even like cars that much. So it quickly passed and then I remembered the goal…FIRE 🙂

  13. We’ve seen this a lot and it has been talked about in the “Millionaire Next Door” book as well. Very typical.

    I actually work for a warehousing and trucking company that is family owned, on its 3rd generation (4th generation starting to work). This family seems to have figured out how to keep the money in the family and keep the work ethic going.

    Apparently, they make sure their kids work growing up, and don’t get too much (no big cars on their 16th birthday). They expect their kids to go to college, but then they expect them to go out to the world and get jobs with other companies. Once they learn new stuff (5 years), they can come work for the company and bring the new ideas.

    The 2nd generation father didn’t just give the company to his three sons – they had to work for the company for 15+ years, and then figure out how to take out business loans and buy a portion of the company from him. Seems to have worked, because it continues to grow and prosper.

    Each of the 4th generation, if the money was split up evenly, would be worth over $50M right now. Can’t help but affect their decision making. still, I’ve worked with 3 of them, and they are all level-headed and hard working.

    Mr. 39 months recently posted…Great post on the 10 Commandments of Early Retirement at the Retirement ManifestoMy Profile

    • Two things in the comments make sense to me and I have seen implemented.
      1) Make the 2nd generation get a “real job.” In other words, they don’t work for the family business but some other company without any string pulling. Make them work there for awhile so they understand what entry level work is and the effort needed to climb the corporate ladder.
      2) Make the 2nd generation buy the family business instead of inheriting it. That make it clear that 2nd generation wants the business and not just the money. If the 2nd generation won’t or can’t buy the business, sell it to a third party when the 1st generation retires.
      This assumes that the inheritance is a business. In my case, the inheritance was cash & a stock portfolio. Maybe my case is a 3rd technique to help save the inheritance.
      3) Don’t give the 2nd generation the inheritance until they are older. I was 40+ when my parents died. You cite an average period of 19 days after receiving an inheritance that the recipient buys a new car. It’s been 700+ days since my father died and I have not bought a new car. I recently gave some thought to how I have changed my purchasing habits since receiving my inheritance. I can only think of three things I routinely purchase more expensive versions of now. 1) liability insurance (greater coverage limits), 2) paid parking (as opposed to free street parking) and 3) gifts for friends and family.
      Another comment shows another attempt to preserve wealth. Create a trust with limitations that restrict the inheritance over time or some performance metric.

      • Thanks for sharing Dan!!! I”m sorry to hear about your parents passing in your 40s. Sounds like you are really preserving the wealth and spending on things that matter to you, which is awesome to hear. I know I’d be tempted to do something dumb, especially if I was in an emotional state. Thanks for sharing!!!

        • Age had something to do with it. Hopefully, I am wiser now than in my 20s. Also the size of the inheritance played a factor. I inherited roughly 1X meaning for every dollar in net worth I had prior to my father’s death, I inherited one dollar. Doubling my net worth is significant but it wasn’t enough to make me think differently about money. Maybe if it had been 10X or 20X, I would have made more dramatic changes. I was comfortable before the inheritance so I didn’t have any pent up spending desires. The biggest gift from the inheritance may be moving up my retirement by 5 to 10 years. However, I was already considering early retirement before my father died. The inheritance just allowed me to focus less on the finance part and more on the “what do I do now?” part. Maybe more accurately, the inheritance makes it ridiculous to use lack of savings as a reason to postpone retirement.

          Finally, a rule of thumb is that after inheriting a significant amount of money, you shouldn’t touch the inheritance for one year. That allows for any taxes to be paid, it allows you to see if the income from the inheritance changes your tax bracket, it allows you some time to process your grief which may affect your spending,etc. Also, after a year, you stop thinking about it as “my father’s money” or “my inheritance.” You integrate it into your existing accounts and begin to treat it the same way you treat “your own” money.

    • Wow that’s really awesome. That seems like a really smart decision and a way to ensure wealth. Plus to have no bickering is even better. They are a model that should be studied by businesses that get passed down from generation to generation 🙂

  14. That was an interesting post. I have a friend of a friend who lives off of a trust. He never met the relative who made the money. They created a technology 100 years ago that made driving railroad spikes into the ground faster. This guy and his 2 brothers each get $18k per month to live on. When he turns 60, he gets $5m. The trust ends with him. It is up to him to save some of that trust if he wants to pass it on.

    • I can’t even imagine what I would do with $200k tax free each year. I definitely wouldn’t work in the job I have now. I can definitely see some short term thinking in my point of view and can see how easy it’d be to keep swept up into a lifestyle that wouldn’t work well for me 🙂

  15. I just finished reading “The Millionaire Next Door” and that chapter on EOC(Economic Outpatient Care) reminded me of this posting.
    It’s really unfortunate the inheritors have a lack of knowledge on how to control the money they are given from their parents. Although It’s not really surprising this happens since we are in a world(more of the US) to consume where their are constant ads to spend and these inheritors are sucked into it. Hopefully more millionaires will provide their kids knowledge and power to know how to save more than spend.

  16. I don’t know anyone who blew through their inheritance but I hope to teach my children (hopefully having them) about the virtues of saving a dollar, earning a dollar, and investing a dollar. I will definitely want them to not make the same money mistakes I made/make.
    Jason recently posted…Another Housing Blues PostMy Profile

    • I’m right there with you Jason!!! I definitely want to teach my children about the value of a dollar. Hopefully they get their mom’s work ethic. She is the hardest working person I know.

  17. Lol I’m laughing so hard, I read the same articles you did when I was researching for how to optimally leave money to my kids. I was shocked when they said most lose it by the third generation. I’ve seen it happen in real documented histories even in the fringe of Rockefeller clan.

    Makes me consider how to teach my kids about money, big time.

    The only big exception is the Rothschilds. Rothschilds…worth…250 billion I believe.
    Lily @ The Frugal Gene recently posted…Don’t (Nicolas) Cage Yourself In FinanciallyMy Profile

  18. That’s what happens when wealth is inherited and not a direct result of hard work among today’s generation – value of money is not realized. Most of the younger ones mismanage the funds of their ancestors, hence the “sudden wealth syndrome”.

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