Carlos Velásquez · Medium · 5 min read · Image Source: Keegan Evans — pexels.com

While adding sliced strawberries to my oatmeal, it dawned on me that my breakfast preparation offered insight into wealth creation and its subsequent transfers. Oatmeal must be brought to a boil and then cooled a bit to eat. Adding pieces of fruit makes the steamy porridge even tastier. Doing so also expedites heat loss in the bowl, as heat transfers from the hot liquidity oats to the fruit.

“Shirtsleeves to shirtsleeves in three generations.” ~ early 20th Century adage

Blame the estate planning podcast I listened to the night before where reference to this early 20th Century adage was made, but the parallels between the thermodynamics occurring in my bowl and the intergeneration wealth mismanagement adage I heard rang clear.

Let me swat away the steam rising from my bowl to explain.

1st Generation: Places A Lid On The Pot

First-generation wealth creators know money can be leveraged and compounded — and when leveraged properly, it can create life-changing wealth.

To wealth creators, money represents units of stored energy resulting from the physical and mental effort they have dedicated to their business and investments; they become expert insulators of unnecessary energy loss in their financial affairs.

Similar to the way one places a lid on a pot of oatmeal that is cooking, first-generation wealth creators place a lid on their spending habits, which enables their wealth to compound.

When first-generation wealth creators spend money, they strategically lift the lid off their finances: spending money educating their kids, paying a premium for a home located in a good school district, dishing out cash for financial planning services, etc.

First-generation wealth creators spend a lifetime cultivating financial discipline over instant gratification to optimize the prospects of compound returns.

2nd Generation: The Heat Stabilizes

When the second generation takes over the family business/estate, it is usually satisfied with retaining the business’ existing market share and receiving market returns on the estate’s investments. The exponential financial growth their parents worked so hard to obtain becomes a nice-to-have but, on a risk-reward basis, unnecessary.

The physical and mental energy applied to the family’s wealth creation decreases since the status quo adequately covers the second generation’s lifestyle. And whereas their parents mitigated financial loss expertly, the second generation can get away with doing so less skillfully.

As the second generation ages, challenges mount. The lid on the family finances begins to rattle. Heat escapes: business challenges (competition) and personal challenges (divorce, sickness, etc.) emerge. Sales and investment returns plateau, even decrease.

Like their parents did for them, the second generation spends money to educate their kids, live in a nice home, and pay for financial planning.

But the second generation also enjoys more leisure family activities, expensive meals, and club memberships that their parents had little time (or interest) partaking in when creating and growing the family wealth.

3rd Generation: Pour, Add Strawberries

Most members of the third generation are not involved in the family business or in managing the family estate. They either lack interest, the requisite business acumen or are pushed out by more ambitious/qualified family members.

The third generation does, however, spend energy protecting their stake in the family estate through lawyers, sometimes leading to family feuds. The passion and inspiration that fueled their grandparents’ financial discipline for the sake of the family go missing. Self-interest pervades.

By the third generation, the metaphoric pot of porridge has been removed from the stovetop, poured while still piping hot, peppered with strawberries and the like, and readied for quick consumption — while the getting-is-good! The economic realities of an upper-middle-class lifestyle aid the process.

Access to a good education, lovely homes, and financial privileges are considered a birthright, a norm within the third generation’s social circles.

The third generation spends most of its life squarely within the middle-class social strata, but the silver spoon it grew up with tends to quench the hunger that led to the grandparent’s financial discipline and economic gains.

When the third generation reaches old age, the family wealth has been dispersed so thinly its members may experience a lifestyle downgrade. Only portraits of the grandparents and sentimental family mementos remain. This is where the parallels between the thermodynamics occurring in my bowl of oatmeal and the 20th Century adage end.

Luck, timing, and hard work (or lack thereof) perhaps best explain the rest of the intergeneration wealth transfer chronicles.

Role Of Luck, Good Timing, & Hard Work

Luck plays a significant role in the success of virtually all wealth creators. Chance encounters, first-mover advantages, and greenfield opportunities cannot be replicated, nor can the sheer genius and grit (and fortuitous timing) that enabled the first generation to capitalize on a once-in-a-lifetime financial opportunity.

We can appreciate that even the most financially astute descendant faces an uphill battle when attempting to match their parent’s or grandparents’ success, especially when the role of luck and good timing is accounted for. Not surprisingly, 70% of wealthy families lose their wealth by the second generation, and 90% lose it by the third generation.

On the flip side, 30% of the second generation and 10% of the third generation do not lose their wealth; perhaps the quote below summarizes the mindset of this latter cohort:

“I’m a great believer in luck, and I find the harder I work the more I have of it. ~ Thomas Jefferson

We cannot control luck, good timing, or the family into which we are born. We can, however, control how hard we work. The results of hard work can compound and create opportunities. The earlier we integrate hard work into our lives, the more we benefit from its rewards — and the greater the chances of belonging to the second generation or third-generation cohort that continues compounding the family wealth.

Or of belonging to the first-generation cohort of wealth creators.

…That will kick off the inevitable wealth transfer chronicles of their respective families.

Author also wrote: 5 Stocks: S&P’s YTD | Inflation Hedges | An 80-Year Life | 13 Rules | N. Taleb’s Minority Rule | Your Inner Voice | Bitcoin’s Volatility | Blockchain Stocks |50 Investment Lessons | Flywheel Effect | Bitcoin: Mental Framework | Crypto Moonshots | 4 Crypto Stocks | Bitcoin: Insurance | Brief History: Money | Spontaneous Order | Ackman’s $2.6B Moonshot | Fragility Inducing Events | Antifragile: Definition | 1% Bitcoin: 99% Cash | COVID-19: Market

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