As parents, our goal shouldn’t be to simply give our children generational wealth. Instead, we should inspire generational wealth as well.
By showing our children how to build their wealth, they will gain the knowledge and skills to continue growing family wealth and happiness for generations.
If we give our kids their wealth without the proper knowledge, they won’t know how to effectively use, grow, and protect it. There are too many stories of lottery winners or professional athletes who get presented with a large sum of money and end up going bankrupt. Why? Because they didn’t have the knowledge or experience on how to manage money.
The Third Generation Challenge
There's a concept called the third-generation challenge. It focuses on research that shows generational wealth fades over time.
This is according to the William Group Wealth Consultancy, which surveyed 3,000 wealthy families, and they found that 70% of wealthy families lose their wealth by the second generation, and 90% by the third.
Many observations are refuting this study completely saying that wealthy families are at a huge advantage of keeping that wealth within their family, not only over generations, but over centuries.
Whether you believe the third generation challenge or not, cultures around the world embrace this idea.
- The Chinese have a saying, “Wealth does not pass three generations”.
- And the Japanese say “Rice patties to rice patties in three generations”.
- Scotland says “The father buys, the son builds and the grandchild begs”.
- And even in the US, they say “Shirt sleeves to shirt sleeves and three generations”.
Now, if this third-generation challenge has any truth to it, I believe that it comes down to communication.
Communication is Key
We need to communicate with our kids about money early and often so they can become good stewards of it and have that wealth live on.
There's a great Benjamin Franklin quote that sums up this generational wealth situation well: “Tell me and I forget. Teach me and I may remember. Involve me and I learn.”
It’s important to involve our kids in the process so that they can learn, grow, and eventually become independent and keep this generational wealth journey going. You can crush those depressing statistics of 70% lost and 90% lost and wipe away these cultural fables, at least for your family.
60/40 Generational Wealth Plan
I've had the pleasure of interviewing hundreds of wealthy families about how they are inspiring generational wealth. And based on that knowledge, I've crafted something I like to call the 60/40 Generational Wealth Plan.
This theory of mine states that if we're able to live on 60% of our income and use the other 40% to give, invest, and save, we will build family wealth and happiness that lasts.
For those living paycheck to paycheck right now, this might feel ridiculous to only spend 60% of our income. But if we teach this financial plan to our kids at an early age, and they get used to it, I believe that this will provide them with stability, independence, and a considerate heart in the future.
Spend (60%)
Most of the money in the 60/40 Generational Wealth Plan goes toward smart spending. We want our kids to enjoy the fruits of their labor and find joy in buying things they like.
This can be things like video games, candy, clothes, toys, or whatever your kid is into. Their interests change from when they are little kids to when they become teenagers. As they make purchases, they’ll make mistakes and that’s okay. This is how our kids learn.
Invest (20%)
The next biggest chunk goes toward investing for the future. This can be a difficult conversation but if we develop the habits early, compound interest will do incredible things for your children’s future.
Investing 20% of your child’s allowance, family gifts or chore money can help them graduate college student debt-free, buy their first home, or even retire early.
Save (10%)
Outside of goals that are decades away, our kids may have financial goals that are months or years away. That’s where saving comes in!
Preferably, you’re helping your child stock away 10% of their income into a high-yield savings account. With higher interest rates lately, your child can see how saving really pays.
Saving can be a smart way to prepare for a first bike, phone, laptop, or even a car.
Give (10%)
Generosity and service to others have been scientifically proven to help people lead happier lives. And don’t we want that for our kids?
With the last 10%, I recommend helping your kids find the joy in giving some of their money away. You can do this to charities and causes that call to their hearts or to family, friends and neighbors in need. For some inspiration, here's how our family's alternative approach to 10% giving.
The 60/40 Generational Wealth Plan In Action
Where does this money come from to execute the 60/40 Generational Wealth Plan? Here are some examples:
- Birthday gifts
- Chore money
- Allowance
- Religious celebrations
- Money from Grandma or Grandpa
- Babysitting funds
- Pet sitting
- The lemonade stand
- Or any other way your kids make money
With that money, split it up so 60% goes to spending, 20% to investing, 10% to saving and 10% to giving. Let's go over an example.
An Example Of The 60/40 Generational Wealth Plan
The “awesome Grandma” gives your daughter $50 for her birthday.
As much as you'd love to see your daughter buy $50 worth of slime or Robux, you as the parent are going to help her make some smart decisions with her newfound money.
Most of it will still go to some smart spending. $30 of the $50 will be allocated to spending. This money will be placed in a checking account (preferably with a debit card option) that your daughter can use for fun with your supervision.
And then $10 of it will go towards investing. Depending on your situation, this could be investing for college (529 College Savings Plan). This could also be investing for a future home down payment for your daughter or even her eventual retirement (Roth IRA for Kids).
$5 will go to savings in a separate high-yield savings account. For family banking, we're enjoying Crew lately. They have a higher APY for savings and checking and could work for both parents and kids.
And then another $5 will go toward giving.
By allocating her income in this fashion, you will show your daughter why it's important not to spend every dollar she receives.
It's a tough sell in the beginning, speaking as a parent who's been doing this for a while. But if we're honest, what part of parenting isn't a tough sell? Convincing our kids to brush their teeth has been a twice-daily drama over the years. Eventually, they brush those teeth on their own and eventually, my kids and your kids will learn the benefits of not spending every dollar they earn.
Final Thoughts On The 60/40 Generational Wealth Plan
As parents, our job is to create smart, confident, and independent children. Not children who are waiting for us to die so that they can get their generational wealth, but children who have figured out with our example and our guidance how to build generational wealth for themselves.
Wealth comes from earning money and investing a whole bunch of it in stocks, real estate, and businesses for a long time. That's how it works. And I believe that happiness can come from serving and giving to others. And that's why that 10% giving is so important.
Now that you understand my rationale for the 60/40 generational wealth plan, consider checking out my course called Make My Kid a Millionaire to see our full 10 Steps to Generational Wealth and Happiness. For blog readers, you can access the course for $50 off by using the code MKM50 at checkout.
What do you think of this 60/40 Generational Wealth Plan idea? Is the Third Generation Challenge something you’re concerned about?
Please let us know in the comments below.
