America is a country without a king.
To fill this void, some Americans watch and admire wealthy families like the Kennedys and the Rockefellers.
These families seem to hold onto wealth dynastically, which gives the perception that once a family has wealth, they remain wealthy.
This perception is false.
In reality, most wealthy families squander wealth as it gets passed from one generation to the next.
The list of wealthy families who have wasted money is vastly larger than families who remain rich over multiple generations.
This is a fact proven by the Williams Group, a wealth consultancy firm. Their study shows that 70 percent of wealthy families lose their wealth by the second generation. Ninety percent lose their wealth by the third.
Many of us are quick to judge these squanderers, but this is a temptation that few experience. We all tend to grow into our income like a child growing into new shoes.
Money management is a skill just as real as playing the piano or sport. If you have no experience, you will fail miserably. Unlike practicing a hobby, money management doesn’t offer second chances; once the money is gone, you don’t get it back.
Parents share all manner of good traditions and skills with their children, but money management is rarely one of them.
We often look to schools to teach these life skills, but most schools simply don’t offer courses in personal finance.
We have seen many well-intentioned parents use wills and trusts to parent from the grave. We once knew a librarian who required her children to submit annual book reports to a trustee to receive their inheritance.
These slow-down tactics can be helpful. Many beneficiaries should not be given a large inheritance all at once.
Probably the best method for preparing children to inherit money is to teach them how to create wealth of their own.
Begin with the basics: budgeting and saving. If a child can learn to save a little from each allowance, then adults can learn to save a little from each paycheck.
As children age, one of the most damaging financial lessons we teach is that wealth is created and preserved by doing well in school and then getting a good job.
While I fully sport studying hard and getting a good job, these concepts are not the key to building and preserving wealth.
Having a good job and income are meaningless if the money is mishandled. The inflows simply need to be larger than the outflows. And once that is accomplished investing can begin.
I firmly believe the best sign that an individual is ready to inherit money is they have created a personal nest egg.
These people know the value of money and usually have the skills required to receive more of it.