I strolled along the bank of a river with a friend I’ll call Bob.
At one point he said,
“I have more money than I could ever spend.
But I don’t want my children to know I’m rich.”
The late Thomas Stanley, author of The Millionaire Next Door, would have approved.
He researched wealthy people for 42 years and offered this tip:
“Assure that your children won’t realize you’re affluent until after they have established a mature, disciplined, and adult lifestyle.”
At the time of our river stroll, Bob’s oldest child was twelve years old.
“He’s starting to figure out that we might have money,” Bob said.
“And by the time he does, I hope the work I’ve put into raising him will make him strong.”
The Chinese have a proverb: Wealth doesn’t pass three generations.
One family generation builds the wealth.
The next generation maintains it.
The third generation melts it like ice cream on a beach.
We often think wealthy families pass money, inter-generationally, like an ongoing relay race.
But that almost never happens.
Most of the families that were rich 70 years ago are no longer rich.
And the Forbes 400 list of richest people overwhelmingly comprises those who are first or second generationally rich.
Here’s what typically happens.
A family works hard to build wealth.
Once they acquire it, they don’t want to see their children struggle.
Unfortunately, they don’t recognise the importance of that struggle.
If you don’t let your child suffer a little, you set seeds to make them weak.
When it comes to money, the wealthy (even middle-income earners) often financially sabotage their children.
When we can afford to pay for our children’s entire college education, we often do it.
When we have the means to buy them a car, provide a down payment for a home or help them start a business, we often do that too.
What we don’t realise, according to Thomas Stanley’s research, is that we’re hindering more than helping.
Like a workout in the gym, we should help our children build their own financial muscles.
Bob knows that.
When his 12-year-old son wanted a Go-Kart to drive in their back yard, Bob showed him how to find a used one online and taught him how to bargain.
They bought one that cost $150…with money the boy had earned himself. The Go-Kart needed work, but that gave Bob a chance to teach his son some basic mechanical lessons.
Bob has a lot of money.
But his children will pay for half of their college education. When they buy a car, he’ll teach them how to find one.
But they’ll have to foot that bill.
In Roger Lowenstein’s book, Buffett, The Making of an American Capitalist, we learn that Warren Buffett loaned his son, Howard, money to buy his first car.
He also charged interest.
He did the same when Howard wanted to buy farmland.
Buffett became the bank.
Thomas Stanley would have deemed Bob and Buffett wise.
He wrote,
“No matter how wealthy you are, teach your children discipline and frugality.”
Allowing them to feel pride in their own financial achievements will make them financially stronger and better-adjusted people.
Such lessons, however, shouldn’t stop at childhood.
Dr. Stanley studied the ten most common professions that attract children of wealthy parents.
He found that adult children who received financial assistance from their parents usually ended up with lower levels of wealth compared to those who didn’t receive such “help.”
He coined these handouts, “Economic Outpatient Care.”
For example, entrepreneurs in their 40s and 50s who received financial help from their parents, as adults, ended up with 36 percent less wealth in their peak earning years, compared to entrepreneurs who did not receive financial help from their parents.
Lawyers who, as adults, received financial help had 38 percent less wealth than lawyers who didn’t.
Accountants who received economic outpatient care as adults had 43 percent less wealth than their professional counterparts who weren’t given help.
Thomas Stanley’s research also revealed that adults who didn’t receive money from their parents invested more money.
It’s natural for parents to say: Life is so hard; we need to help our kids.
But that’s exactly why wealth rarely passes three generations. And plenty of middle-income parents fall for the same trap. They also want life to be easier for their children.
They don’t want them to struggle.
If we don’t, however, give our children a chance to struggle (at least a little bit) we set them up for weakness.
My friend Bob, Thomas Stanley, and Warren Buffett know that.
Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.