Have you ever heard the phrase “shirtsleeves to shirtsleeves in three generations”?
This site notes that other cultures have similar sayings (Japan: “Rice paddies to rice paddies in three generations.” Scotland: “The father buys, the son builds, the grandchild sells, and his son begs.” China: “Wealth never survives three generations.”) and here’s how it explains them all:
Around the world there are many variations on this theme, all used to describe the tendency of the third generation of a family to squander the wealth obtained by the first. One reason suggested is that the third generation often lacks an understanding of the work needed to build and maintain family wealth due to their dissimilar upbringing.
Generational Wealth
They go on and describe the phenomenon in detail. Their thoughts:
The first generation experiences a life of hardship and is determined to make something better for themselves. They are willing to work hard and save diligently in order to achieve their goal. By their later years, their efforts have paid off and they enjoy a comfortable lifestyle often with assets to pass on.
Their children, the second generation, grow up a witness to their parent’s struggle and understand the value of hard work. Although they now live a more comfortable lifestyle, they may still remember a childhood filled with frugality. Because of this awareness, they make sound educational and financial choices that allow them build upon the foundation their parents worked so hard to create. By retirement, they have acquired even greater wealth.
The third generation, however, has no memory of want or struggle. They only know a life of plenty and often lack a realistic understanding of the work needed to create and maintain the lifestyle they now enjoy. When family wealth is passed on, the third generation is simply left to squander what their grandparents and parents worked so hard to achieve.
I am the second generation in this story. I saw how my parents and grandparents struggled and had various levels of success (nothing great, mind you).
I grew up understanding the value of hard work (walking beans will do that to you!!) and certainly had a childhood filled with frugality.
As a result I made sound educational and financial choices that allowed me to build on what my parents did. Doing so I was ultimately able to acquire a solid net worth.
The Third Generation
My kids are the third generation. They have no memory of want or struggle. We were not big-spenders, as you know, but there was certainly never a lack.
We’ve taken the kids on three cruises and have been all over the U.S. traveling. They have been on service trips out of the country as well.
We do things like buy them new cars and pay for college.
They have only known a life of plenty. I wonder if they lack a realistic understanding of the work needed to create and maintain the lifestyle they now enjoy. I wonder if they will squander what my wife and I have worked so hard to achieve.
It’s too soon to tell.
It’s Hard to Pass Wealth Along
Here are some numbers on how hard it is to transfer wealth intergenerationally:
- 70% of millionaires lose their wealth by the second generation
- 90% of millionaires lose their wealth by the third generation
Seems like the old saying is true. Shirtsleeves to shirtsleeves in three generations is a real thing.
I once knew a family where the father started out poor. He worked several decades and eventually built a successful business. He is now very wealthy. His kids (who are my age) saw and lived the struggles their parents faced. They remember working at the business for a few dollars an hour. They recall the time the company almost went bankrupt. They remember when meals were hard to come by.
Their kids (the grandchildren of the father), on the other hand, have always known a family that was extremely wealthy. They don’t want anything to do with the business (or even work for that matter). All they want is their share of the fortune. I know the grandparents and parents are trying to figure out if and how to pass their wealth along without simply flushing it down the toilet or ruining lives.
How to Pass Wealth Along
We obviously don’t have a great fortune like that, but we do have a good amount of wealth. As we’re working on updating our will and estate plan we’re also wondering if and how to pass along our wealth. Do we give it all to the kids? Give them nothing (but the education and some financial support along the way)? Or do we give them part of what we have and give the rest away? We’re still trying to sort that out.
I wonder if giving money to our kids once they are adults will harm them. Why? Because one of the seven common traits of millionaires detailed in The Millionaire Next Door is “Their parents did not provide economic outpatient care.”
For those of you wondering what that is, economic outpatient care is defined as:
Economic Outpatient Care (EOC) is a term used to express when an affluent parent provides money to an adult child. Offspring who receive EOC have 57% of the net worth compared to their counterparts who are not recipients of EOC. EOC gives recipients a false sense of financial security. For this reason they purchase homes in upscale neighborhoods that exceed the recommended value according to their incomes.
These homes then demand nice cars for the driveway, nice furniture for the living room, and a nice plasma TV to complement the furniture. These offspring also purchase and consume the EOC rather than invest it. If a dose of EOC is given on a regular basis, the EOC can actually be absorbed into the individual’s perceived annual income. Expenditures are then calculated with the anticipation of a regularly scheduled dose of EOC.
In other words, people who support their adult children financially on a regular basis aren’t really helping the kids, they are enabling them. In the long run, the kids end up being terrible money managers as a result.
Obviously this is not something I want for my kids.
Can You Teach Wealth?
It seems to me that in many ways wealth is not teachable. For instance, if knowledge of financial matters was all that it took to become wealthy, most business people, professors, financial planners, and many others would be very wealthy. And yet most aren’t. The reason? Because becoming wealthy requires much more than knowledge. It requires discipline, hard work, patience, self-control, sacrifice, and a few other traits that are much harder to teach and pass along than pure educational knowledge/learning.
Of course we’ve tried to do this and time will tell whether it works or not. Both of our kids have jobs and work 25-35 hours a week. My daughter is also going to college part-time. But have they developed the skills to be able to handle a windfall of half a million dollars, a million dollars, or more?
As you can tell, I’m still thinking through these issues. I’d appreciate your thoughts on the subject. Anyone seen success in passing along wealth? What are the keys to doing so?
photo credit: Kate~2112 An old broken watch via photopin (license)
Erik @ The Mastermind Within says
Hey ESI,
I think about this conundrum often. My grandparents were financially successful, my parents are worth roughly $2M, and I’m looking to build wealth responsibly and carefully.
I don’t know how to solve the issue – having your kids work 25-35 hours a week teaches them a work ethic and appreciation for money. 35 hours at $8 an hour (or some other low wage) isn’t a lot. When they get more money, they will hopefully still have the same habits they had a $8 an hour.
I worked as a lawn boy for 4 years in high school/college, had some tuition help, and now off to the races. I definitely see some of the signs of “laziness” in my sisters… We will see the results!
Thanks for sharing ESI.
nsdavid says
Erik, I started working mowing lawns etc. in 5th grade as one of 4 kids single parent family. I saw my mom save to multi millionaire status. I am likewise doing well. I am stair stepping the money to my kids with the largest sum at age 50 and none until 35 if i am gone by then. I will pay for college but not a dime thereafter until i pass .
Jim says
To be truly happy you have to understand sadness – same goes for wealth. If you don’t know about life without means then it’s hard to appreciate what you have, something we’ve been aware of given that our kids are young. I think it’s hard to teach those lessons later on in life so we’ve been focused on making sure life isn’t too easy for our kids now – struggle is good. Whether it’s overcoming financial struggle or something else (and at this age, it’s always something else), building that muscle early has been crucial for their well being and ours!
Fritz @ TheRetirementManifesto says
The “3 Generation Thing” had always fascinated me. So consistent, regardless of culture, and obviously a very difficult cycle to break.
In our case, we’re 2nd generation, similar to you (some wealth, but not extreme). We’ve told our 22 yr old daughter she should expect no inheritance, since we’re using it to retire early. Hopefully she’ll be motivated to achieve her own Financial Independence.
In reality, she’ll probably get a “surprise” when we die, but by then we hope she has a strong, mature foundation, and puts the inheritance to good use.
The magic bean counter says
This is such a tough topic to get a hold on. Part of me likes the idea of leaving a bunch of money to my kids to make sure they are taken care of, and another part definitely sees the value in having them earn it themselves.
I think ill ultimately try to find a middle ground.
ESI says
This is what we’ll likely do — give some to the kids and give the rest away.
K D says
We do not have as much as you ESI but we have a couple million and “should” have more by the time my husband retires. Other than that our story is similar to yours. Neither set of parents had much money when we were growing up but my parents were/are in a good place in their retirement (but we’re not counting on an inheritance). With a 21 year old we have been thinking that we need to revisit our will/estate planning. I have no idea how our child will do with managing money. She does not ask us for money/things and she chose a college that has cost us very little but she does like to spend what she makes. Overall she is very responsible in life. Time will tell. I hope to see more articles on this subject, it is close to home.
Mike H says
I’m second generation- it’s interesting as I’m the only one of three that hustles for career and financial growth. For me it’s just a challenge. My daughter is only 4 but I’ll do my best to make it fun for her and to appreciate the game and challenge aspect of creating her own wealth and help fast track her to get into good habits from the start. Time will tell.
On the other hand, the bright side of the three generations is that social mobility in the USA and rest of the world is high, as most have to earn their rewards and those that don’t earn it aren’t able to keep it either. Funny how that works.
-Mike
Paul says
This seems to be the big problem – parents do well, want their kids to do better, and in so doing, may be depriving them of the key lessons and experiences that led their own success.
One thing that has helped me in my life was growing up at the lower economic end of my social group / school – I learned that there was no point trying to compete on material stuff ’cause I wasn’t going to win, and I also learned there are far more important things than money. We’re in a more affluent area than the one I grew up, but my kids will have the same lesson (at least on a relative basis). I’m hoping that helps them, but I think every parent is struggling with the same decision you highlight. When you crack the code let us know!
Bad_Brad says
I don’t want my kids to inherit my wealth. My wealth is going to worthy causes, namely our Church and its missions. My kids can fend for themselves just like I had to. There is no more common parenting folly today than the desire to give kids every material possession and shelter them from any kind of hardship or struggle. It’s no wonder we have such entitled young people nowadays.
Ty Roberts says
I’ve *never* heard that ‘shirtsleeves’ idiom, but it’s very intriguing. I’m in the second generation of that cycle as well, yet I absolutely want to pass as much wealth to my kids as possible.
Maybe it’s because I *do* remember growing up without much and don’t want my kids to go through that? Or maybe I’m just arrogant in thinking that I can teach them how to handle the money. Either way, as it stands today, I’ll be passing my wealth to my kids.
Good post – very thought provoking.
Tony says
So you rogued beans? Did the same. Ever contract detasseled? Or baled up in the loft in August? Not fun. Worst was probably when I helped…ah… maximize the growth potential of pigs.
As for kids, I don’t know the answer. I have hope for some of our third generation (I’m second) and other times I despair. The best (and hardest) results have been when we go hands off, watch them smack the concrete face-first and then let them get back up. Really hard to do. And some of them seem to keep screwing up! We can only hope they’ll age out of it or join the military…
ESI says
No, never did corn thankfully. 😉
MMD says
This is a topic I think about all the time; especially now that we have finally set up our trust / wills in case something tragic happens. As our children get older and are entering their teenage years, they will soon be young adults, and what then? Will they listen to Dad? (most teenagers do, right? ….) Or will the wealth my wife and I are building up be squandered?
FullTimeFinance says
First generation growing up ( unless you consider one parent who cared enough to push me to get an education, but couldn’t fund it, as a generational leg up). However at this stage we have a bit of a twist. We had our kids in my thirties after much of the groundwork is already laid. They missed the struggles and the Ramen. I will do the best I can to teach them responsibility. I also plan while I’m alive to only contribute to their education, material goods are on them. Hopefully that gets us through gen 2. Gen three is so far off with my oldest being four that I can’t consider it.
Bruin says
I find it intriguing that most who commented are second generation – as am I. Regarding estate planning, I long ago read that being a good steward does not mean leaving a large inheritance equally to once children. Some may prove to be good stewards and others not; it is squandering your own wealth to turn it over to a generation that will not use it wisely. Something to think about and watch out for, to be sure. Good thoughts as always, ESI.
Brian - Rental Mindset says
As you noted – “Should you” is a much tougher question than “how”. Or “how can you successfully”.
How is simple – real estate has incredible tax benefits when it is inherited!
One Data Point says
I find it interesting that I’m unique among the readers in being third generation. My grandfathers were both first in the family to go to college and became a doctor and a shopkeeper. My parents did not inherit any money, although they did get college paid for and help starting. My parents built up millions of dollars through frugality and hard work, although they picked jobs (professors) where they expected never to be paid well. My sister and I each sold companies for very large amounts of money when we were in our 30’s. We did not grow up feeling any sense of want, but we did feel intense family expectation to be successful. Not necessarily financially successful, but to do *something* very well (arts, science, business, etc.) My thinking is to try to pass on the same things to our kids – the idea that you have a moral obligation to use your talents to the fullest, quite unrelated to money. Does anyone else see this this is a realistic approach – to provide material comfort but also instill an ethic of hard work and excellence for its own sake?
ESI says
I can see it as a big motivator, just not sure there’s a tried and true formula for instilling it in kids.
Anna says
I’m third generation and I’m pretty confident that I won’t fall into that cycle. My grandparents were depression era poor. Things were very tight for my dad growing up. I think the biggest days of my grandparent’s life financially were when they finished building they’re house by hand in rural NC and when they were able to buy a Cadillac in their early 80’s. Similar situation on my mom’s side. She tells me the first time she owned store bought jeans was in high school and she begged my grandmother not to wash them or cut the tags off so that people would know they weren’t homemade. Mom’s parents are now worth multiple millions.
I know my parents worked hard to build wealth and pay off student loans but I don’t have any memory of that. I basically grew up upper-middle class. We took a vacation almost every year and I got to play expensive travel sports which I loved! My parents also covered the difference between my scholarships and the cost of college enabling me to have the huge head start of graduating debt free.
That being said, I’m in my late twenties and my net worth is ~500K. I’m maxing out retirement accounts and perusing financial freedom. I’m not sure what the driver is but I think a big part of it was giving to charity when we were young. We were required to give part of our allowance away and I really made me appreciate what I had and also the value of a dollar. Of course some of it is also probably personality and opportunity. I do wonder if I retire early (hoping for late 30s) if that will affect my kids work ethic. Will seeing mom and dad “without a job” make them think it’s ok to coast and be lazy? Hopefully not. Thought provoking post!
Ten Factorial Rocks says
This is a thorny issue, and there is no easy answer. I am somewhere between first and second generation and do worry about my 10 yr old kid who is growing up privileged. I read out to him stories of people who struggled in life and later became successful, including my own childhood examples. I hope some of it sinks in. I have created a small savings account for him and take him along to the bank to show how deposited money earns interest – he is currently thrilled that compound interest is more than simple interest!
Janet says
2nd generation here. My father believed in living with modest comfort. The only things he felt one should spend whatever it took to get the best were health care and education. I have repeated that mantra often to my children, now in their 20’s. They have trust funds, as I did, that terminate when they are 29. My husband and I retired when our kids where very young, living on income not principle. Again, modest comfort and security but not lifestyles of the rich and famous. We paid for their college and gave them our old cars when they needed to commute. They recognize that they have advantages their friends lack.
We helped daughter pay for an apartment for one year (wanted her out of the house!) but now she shares with a friend to keep costs down. Finding jobs that pay well is very challenging here. She plans to keep trust fund money intact until she is ready to buy a house, even though there is plenty she’d like to spend it on.
Son is finishing up a master’s degree in civil engineering. He should be able to get a good job. He doesn’t spend much because there is not much that he is interested in having.
Both kids ought to do ok. Neither worked in high school or college. Both have had access to UTMA money but neither have touched it. I’ve tried to teach them how to manage and grow their money — and how not to waste it.
M Ward says
Reminds me of Warren Buffett’s pledge to give 99% of his wealth to charity. Of course, 1% of Warren Buffett’s wealth is still more than I’ll ever have….
I’m only about a year into following the ER/FI community, but it looks like we will probably reach Financial Freedom in about 5 years. It helps a lot that my spouse just stumbled into a very lucrative career recently, but we don’t really act like it. A family member said we acted like the poorest rich people she knows. Which I took as a compliment. I want to be the Millionaire Next Door (good book).
OK, so my kids. I love your post on allocating a set amount for college, where anything left goes to the kid. I think that could be the key to getting my son on the right track. Another approach I’ll probably combine was one post I read about a child who lived at home, but the “rent” was proof of contributions to their retirement account at work. One key point of the “Economic Outpatient Care” was that the kids saw the money as part of their baseline income. I’d be willing to help fund my kids retirement investment funds, but not their lives. Maybe like the rent idea, there is a retirement “match” contribution idea that could be worked out.
So I guess my overall goal is to direct all the financial discussions with my kids towards Financial Freedom for them as well.
Bret @ Hope to Prosper says
I love the excerpt from the Millionaire Next Door. My kids have finally moved out and we don’t provide any kind of EOC, except college funds. I have helped them out in a pinch, but it’s never ongoing. It’s far too easy these days for kids to expect everything to be given to them and society is constantly telling them they are entitled to it. As a parent, you have to make it very clear that mooching is not an option.
One of my favorites is The Five Laws of Gold from the Richest Man in Babylon. I have made my kids read this chapter a couple of times. Then, I told them, “Don’t expect any inheritance from us if you don’t have your own finances together by the time we die.” I want them to be successful on their own efforts, instead of waiting around for a hand out.
A lot of wealthy people are starting to rethink inheritances or at least make them conditional. Why circumvent the lesson from their struggles and undermine the incentive for them to succeed?
Another opinion says
I know it’s a minority opinion, but I’m not totally convinced that giving kids a helping hand after college is necessarily a bad idea. EOC seems like a pejorative term. But, my grandparents helped my parents buy a house beyond their means (at the time). Not only was it a great place for me and my sister to grow up, but it also ended up being a great foundation of wealth for my parents. My parents in turn helped me buy a house – this was one thing that enabled me to work at a low income on my start-up company, which I since sold for a eight figures. So, I would submit that it’s a situation- and child-dependent question, rather than a blanket bad idea.
getagrip says
Two points in my mind (and I consider myself second generation) on the generational differences.
First and foremost is your kids aren’t you and aren’t your grandparents. They may understand hard work, but they may not have your drive, your ambition, your “fire in the belly.” They may not want or may determine that what you have struggled for (trappings of wealth, security, etc.) are important. I have one child like this, and they are no longer on my dime and don’t ask me for money, even though I know they are struggling financially. I provide advice and recommendations, but they live their own life and really, truly, like what they do, though it pays crap. In the end I have nothing to say as I raised them to be independent and they certainly are.
The other point is expectations. It isn’t about what you say, it’s about what you do and how your words mesh with your actions. If you complain how you have no money, but fund every single thing the kid wants to do, or rush in at the first sign of trouble and bail them out financially, what are you teaching them? If your kid commits to spend your money and seeks you after the fact, for example telling everyone they are taking a gap year to “find themselves” between high school and college and then coming to you to pay and you do pay even as it hurts your finances and you disagree, what are you teaching them? Consider for a second, that you and your spouse are the sole source of your children’s income for over a decade before they can start making their own money. Everything they want they have to ask, demand, negotiate, or manipulate from you to pay for. They have zero real incentive to change that script especially with a society that has taught them that parents “owe” them, rather than understanding they owe us for their very existence. So you, as the parent, have to guide the change. I’ve known parents who told their kids as soon as they hit 18 they are out of the house and on their own, and followed through. I’ve seen other parents who tell their kids a lot, complain a lot, but bail the kids out to their own financial detriment and the kids never learn even into old age, often seeking another person to be surrogate financial parent after their real parents pass away, typically a sibling or sympathetic cousin. I think there is a large gray area between those two spectrums but clear expectations (from an early age) with some flexibility should be made clear. For example, I laid out my expectations for my kids for post high school: Seek education beyond high school (trade, college, culinary, whatever) and I pitch in the equivalent of two years community college and two years state as a maximum, join the military, get a job and start paying me rent, or voluntarily leave before I kick you out and go mooch off someone else. They are adults and expected to contribute if they live at home. The details are negotiable, but it sets the expectation. There is no free ride.
The hardest part is YOU. You have to get past this idea that your kids need rescuing and need you to help control their lives. You have to move from manipulator and scheduler of their activities to a remote councilor, and that is very hard. It’s hard to see them struggling over a few hundred dollars that may be no big deal to you. It’s so tempting to just “clear the plate” and let them “start fresh”. You have to hold back that desire to just send them money, even as you provide council on ways they can attack their financial issue. In the worst cases you have to be the one to sit back and let their car get repossessed, let them get evicted, let them face the consequences of their actions, in other words, watch as they slowly FAIL and that is really, really, hard. After all, they are your kids, you want to set them up for success, but I can state that even after having read the MND and the whole Economic Outpatient Care issues and with examples of failures in my own life all around me, it is still emotionally hard to see your child struggle even when you know it’s part of their getting stronger.
ugeauxgirl says
I’m a financial advisor (I know- Boo hiss and all that) and I talk to my kids about money a LOT. When my then 7 year old responded to me saying something was too expensive by saying I should write a check for it, I stopped and sat down and explained to both of them how checking accounts work. It isn’t free and it IS your money, and you can’t write a check till after you put money in the account, etc.
I have been known to make them listen to Dave Ramsey in the car- which usually ends up in interesting questions and discussions. One of my children (12 years old at the time) who has superhuman hearing, once over heard our net worth from the next room. We froze when he ran back in the room and demanded to know if it was true that we were millionaires. We couldn’t think of what to say, so we told him the truth- and the importance of not talking about it to anyone else. What followed was an amazing discussion, he asked surprisingly good questions, and we explained as truthfully as we could. We finished up the discussion saying that this money is OURS and not yours. He hasn’t brought it up even once when we refuse to buy him things, which we do often.
We have told them that we have saved something near the cost of a 4 year public university in state. If they get a scholarship, we will give them whatever is left at graduation. If they run out, they are on their own. If they choose not to use it for college, we will go on a really nice vacation. We do not plan on giving them financial assistance with house purchases or anything else.
We make good incomes, but only spend about 60K a year. I will be retiring in a year at age 46, my husband is 53. We have given them the tools to suceed, and a good example of the rewards of spending and saving wisely, but their lives are up to them!
ESI says
You have a good sense of humor — I like the “boo hiss” comment. 🙂
Jon says
My wife and I have a 2 year old and a new born, but we too, already have spent much time thinking about these issues. After reading the post and comments, we were not able to determine which generation we each fall into, but we are concerned about our children nonetheless.
Time will ultimately tell, but I think we came up with an interesting trust provision in in our wills, should something happen to my wife and I together. We will provide income from the trust to assist them with educational and health related expenses, but any remaining income generated from the trust annually, will be donated to charities of their choosing. Once they reach the age of 30, they will have the ability to request principal distributions from the trustee, only in an amount matching their accumulated net worth. They will be able to request the principal distributions every 5 years, matching their net worth, less previous distributions.
I think third generations have trouble maintaining wealth because they haven’t learned what it takes to build that wealth. We want our kids to inherit our wealth, but only after hey have learned how to manage their own. We hope to obviously be around to teach our kids these principals, but think our estate plan will put the incentives in place, in case we aren’t. This blog does a wonderful job teaching the foundations of building wealth, so it would one of several I’d be comfortable pointing my children to in our absence.
Would love to hear what others think about this idea as I’m sure our plan will evolve as our kids grow and my wife and I relect more on this interesting topic.
ESI says
I’ve been thinking more about this subject as we try to complete our will. I’ll likely post some additional thoughts in a month or two.