From Rags to Riches to Rags

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Among wealth advisers there is a saying, the first generation makes it, the second spends it and the third blows it.

This is not new, an old Chinese proverb states; ‘fu bu guo san dai’ ‘Wealth never survives 3 generations

According to a US study, 70% of wealthy families lose their wealth by the second generation and a whopping 90% by the third.

What is it about easy money? What is inside many of us humans that leads us to throw out the lessons they we have learned about managing our own money and just go and spend like there is no tomorrow.

I personally think the first generation understand the blood, sweat and tears, it took to build the assets in the first place. On top of this they generally had a purpose and vision around their wealth and it wasn’t just about money.

We have all heard the stories about lotto winners blowing their winnings. If I told you today you had won $5million what would you do with it.

According to the National Endowment for Financial Education, 70% of significant lotto wins are broke within 5 years. The two main reasons are;

The first, they give too much away to family and friends. What is it about this easy money that friends and family feel a sense of entitlement to some of it. It wouldn’t be the same if you sold your business.

The second reason is they squander it on depreciating assets. Not a great investment strategy.

So what can we learn from the above when it comes to our own Estate Planning?

In the book Beating the Midas Curse, the authors state that the greatest inheritance you can give your family happens while you are alive. This involves including your children in the estate planning process.

The first step is to articulate your values and beliefs around the money you have built over your life.

Setting a vision statement for future generations outlines your definition of wealth and the desired effects you would like to see from your Children receiving an inheritance.

Including your children and beneficiaries in the process increases the chance of them buying into the vision and outcomes of the inheritance process.

Normal estate planning will deal with your assets according to your wishes. But as I explained above, easy come easy go.

However, with a little planning and professional advice and support, a lasting inheritance that enriches your beneficiaries’ lives and doesn’t tear them apart is worth the effort.

Stephen Lowry CFP, DFP, FAIM, is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.

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