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There is a stark difference between personal wealth and family wealth. Personal wealth (also called individual wealth) is used for personal reasons. But family money, that is to say, family financial capital is used for different reasons. It is the lowest in order of importance of the 4 types of capital, but still a powerful resource.
In this post, I will cover what it actually is, how to harness it, and what it’s actually for – without raising spoiled trust fund kids that have to outsource tying their shoelaces.
Just to fill you in, if this is your first time encountering my content, the types of capital are, in order of importance, Human, Intellectual, Social and what we’re talking about today, financial.
But why is it, that in generational wealth, financial capital is the least important?
There’s no money without…
When it comes to generational wealth, it does no good to believe your family is going to hold any sliver of fiscal wealth without a coherent and strong family culture to back it and shepherd it. Basically, there’s no family financial capital without any family.
Family money isn’t quite like personal money. It isn’t to be consumed or to be used for any lavish reason for any one individual. And it is never given away to any one member. This is why you see people most that have inherited wealth, never creating true old money.
Old money isn’t actually owned by any one individual. Old money is cash, investments or assets that come under the collective ownership by the family as a whole. And this financial capital is a tool to support the growth of the intellectual and human capital of a family in both competency and creativity. It is used to improve the lives, not the lifestyles of the individuals in a family.
The Business of the Family
A family looking to preserve wealth needs to think like they are in business. The business of your family is to improve the lives of the constituent members of the family.
There’s a proverb that takes many forms across all cultures, shirtsleeves to shirtsleeves in 3 generations. I actually think the Scottish put it best though.
The Father builds, His son buys, His son sells, and his son begs[…and has to rebuild.]
Basically what this is saying is that in typical situations, the wealth created by one generation is dissipated by their grandchildren. There is a period of creation, then stasis, then through decay or entropy to disorder – much similar to the rules of thermodynamics.
In ordinary families(rich or poor), this 3rd generation is distant enough to not value or see the effort that was put in to build this wealth. There are typically more members of a family by this point as well, leading to a greater division of wealth. And this higher quantity and introduction of spouses into the family leads to a dilution of family culture.
Defying the Odds
So if the odds are against us, how do we go about keeping this accumulated wealth?
Firstly, it begins with the prioritization and accumulation of the other forms of capital – Human, Intellectual and Social.
Most of keeping wealth in a family lies within a strong, intentional family culture. Hence why Human capital takes precedence over all others.
Generations that simply inherit capital have no idea of its true worth nor the difficulty that goes into creating it. They don’t intend to be stewards of it, nor multiply and nurture it into more for future generations. They view wealth as an individual pursuit and thus use it for individual reasons. Which is a sure-fire way to make sure that the family as a whole will not benefit from it.
Each generation needs to see themselves as ‘the first’ to inherit what has been built thus far.
They need to learn how to create wealth for themselves, provide true value to others, and learn how to support themselves and their branch of the family. You probably have done or are trying to do the same.
Referring back to the thermodynamics comparison, you want to keep your dynasty in a constant state of creation when it comes to family financial capital.
Family wealth is not to make it so members do not have to work. That would be the fastest way to ensure that the wealth is lost in 3 generations.
You’ll find quite the opposite is true in most old money families that have beaten this 3 generation rule. For the most part, the members are harder working than most ordinary folks. And this ethic comes from a good family culture.
Time should also be thought of differently when it comes to generational wealth. An individual has limited time. They are born, they will live and eventually pass away. But a family is created, reinforced with culture then exists as an idea, a concept and a collective.
A legacy family has a low time preference.
A dynasty transcends time of any one individual. And instead of thinking in years, they think in generations. Whereas for individuals, short, medium and long term may be 2, 5 and 10 years respectively. For a family, these change to 1, 2 and 3 generations(25, 50 and 75 years), respectively, or even longer.
This changes the perspective on investing significantly, with much larger time horizons, compound interest is able to have an even greater effect than before. This is why growth investing is so powerful for a family.
Every dollar you save as a Founding Father or Mother of a generational wealth family can become more than 30 or 40 in 2 generations time. Even inflation-adjusted, this is still the equivalent of around 12 to 16 dollars today.
Say you were going with The Great Accumulator or The Collective Method approach to creating this family financial capital. By spending unnecessarily, you are effectively robbing your family of their seed capital, in a sense.
Building The Wealth
I will refrain on how to build family financial capital in this post. For a brief overview, you can check out the mega-post on Generational Wealth here. There is another post you can check out on the 3 methods to build generational wealth that I have found in my research.
I will say that work ethic and input is imperative to build generational wealth. People that build massive wealth typically don’t want to retire, especially early. They can turn this fiscal growth into family financial capital and then choose to apply their skills their entire life and grow an empire alongside their family.
So once you build all of this capital. What is it for?
Well, it’s rather boring…but nothing ‘lavish’…really.
You don’t use it to go and buy everybody Lamborghinis, you don’t use it to buy expensive clothes and lavish homes for individuals to live rent-free. and you don’t simply hand the keys to the kingdom over to unprepared descendants.
Simply handing the money over is the folly of a lot of would-be generational wealth families.
Most people, given an inheritance, promptly blow it, intentionally or not. Either that or they covet it too closely and fail to grow and nurture it in the proper way. This is comparable to lottery winners. Most everybody who wins, quickly becomes a loser.
But inheritance in the form of family financial capital is different. It isn’t given away to any individual. It is instead used in the personal development of family members in both competency and creativity.
It opens the doors to prestigious organizations, provides career, business, and educational opportunities.
It is invested, loaned, grown, nurtured but never spent. With family financial capital, the principal is never ever drawn down, and it is never given away.
Further, the way you prioritize the use of this capital is entirely up to your family. You may look at doing the boring old ETF investing and forget about it, but then it isn’t much good to the family as a whole, and may as well not exist.
This is a good way to preserve and grow it, but not a good way to apply it.
Some quick ideas:
- Use the appreciable income the family wealth generates to supplement the children’s education in private institutions.
- Loan some of it for a member to start a business.
- Buy a large plot of land for the family to build a community of houses on, which are rented to the family members with the rent flowing back into the family coffers.
- Create and maintain your Family Sanctuary
- Buy housing for family members and rent it out to them at a discount. Like featured in The Collective Method
- Funding multi-generational restorative projects, like planting forests, preserving wildlife etc. These projects take more than an individual life, and families can be great advocates for these projects.
- Some 10 figure families even do income matching for their lower-income earners(eg make 30k, the family gives you an extra 30k), allowing for career freedom.
- For a collective pursuit, buy family assets for the use of all members. Perhaps you buy a holiday home, which is treated as a short term rental, and when family members want to use it, they pay a discounted rate to do so. Same could be said for a family boat.
The possibilities are limitless but it will really come down to your family culture at the end of it all.
I have a friend and customer who turned his business from building homes into an industrial property investment business. His son is a 50% owner as well. They drive around old beaters and dress very modestly, despite collectively being worth mid-high 8 figures, at a guess.
Depending on your personal beliefs, charity, or at least philanthropy can be another use of your family financial capital. Perhaps your family decides they want to put money towards research into developing cures for MS or cancer, or perhaps your family wants to build or donate to wildlife reserves to protect the heritage of the planet.
These are noble and just pursuits that are better achieved with collective wealth than by individuals with picket signs. These also require a sustained input over time, and with a families approach to time, this can be a true legacy of a founding parent.
Charity can also be a great way for grandchildren and grandparents to bond over common causes, and for grand-kids to begin getting involved with managing family wealth.
So who decides how to handle this wealth?
In the infancy of your legacy family, this is probably going to be the wealth creator. But as time goes on, you will form a family council, with the intent being managing family affairs. Eventually, the Founding Father and Founding Mother will need to hand control over to this council.
Members of this council are usually entirely made up of members of the family, but oftentimes, at least in wealthier families, outside counsel is oft sought.
The financial branch of this council, called the ‘financial committee’ makes decisions for the collective benefit of the family and its application of wealth.
The collective family wealth is referred to as ‘The Family Bank’.
Remember that giving by giving family financial capital away to any individuals, it will get treated like individual wealth, and this isn’t the goal of an old money family.
Managing family financial capital as a whole and never simply giving it away to family members is the approach all old money families seem to use in one form or another. This applies even more so if they make use of a single or multi-family office. But more detail on this in another post.
Remember that Financial capital for a family is not the same as it is for individuals. It is money intended to support the human and intellectual capital of the family, improving upon the competency and creativity of its individuals. It is used to improve the lives, not the lifestyles of the individuals in your family.
Family financial capital is like the fulcrum when it comes to generational wealth, whereas the other 3 types of capital are the levers. Without a long enough lever, no fulcrum in the world will do you any good to shift any weight. Work on Human, Intellectual and Social capital and the financial capital will follow.
What are you going to use your family financial capital for? Drop me a comment below letting me know.
Thanks for reading.
This Post Has 2 Comments
Really interesting post!
This really does become a complex math equation when you account for inflation, investment returns, and estate taxes. And like you say in the post, building wealth (as a family) does require a strong family bond and work ethic.
100%. Money is the least of it when it comes to building generational wealth.