The Money Muse

The idea of passing on wealth to future generations is something that many people, including myself, find appealing. While I’m not sure yet that I want to have kids, the thought of leaving a legacy and helping my future generations thrive financially is something I consider as I work toward building my wealth. However, there’s a concept known as the “third-generation curse” that makes this goal more complicated than it might initially seem.

What is the third-generation curse?

The third-generation curse refers to the tendency for wealth to be lost or diminished by the third generation of a family. It is often described as the pattern where the first generation works hard to create wealth, the second generation maintains or grows that wealth, but by the third generation, that wealth is typically squandered or dissipated. This phenomenon has been observed in various wealthy families over the years and has been the subject of research in wealth management.

Why does it happen?

There are several factors that contribute to the third-generation curse, many of which involve a combination of entitlement, mismanagement, and a lack of financial education.

1. Lack of financial education. The first generation builds wealth through hard work, investment, or entrepreneurial success. The second generation is usually taught to manage this wealth, but they still tend to have a connection to the hard work that generated it. By the third generation, however, the wealth may be inherited, and the heirs might lack the same work ethic or understanding of how to manage and grow their wealth. Without financial literacy or an understanding of the effort it took to build the wealth, it’s easy for the third generation to squander it.
2. Entitlement and a lack of discipline. The third generation often grows up with the advantages that come with inherited wealth. With little need to work for it themselves, they may develop a sense of entitlement, assuming that the family’s wealth will always be there. This can lead to overspending, poor financial decisions, and a lack of appreciation for the value of money. In many cases, the lifestyle expectations in wealthy families become unrealistic for those who haven’t had to earn the money.
3. Family dynamics. In some cases, family conflicts, mismanagement, or disagreements about how the wealth should be used can prevent it from being passed down effectively. Generational wealth can often cause division or disagreement about how it should be managed, leading to legal battles or decisions that aren’t aligned with the best interests of the family.
4. Poor investments or risky business decisions. Wealth that is not properly managed can also result in investments that don’t pay off. The third generation may inherit a fortune without the necessary knowledge to make informed decisions, which can lead to poor investments or risky business ventures that don’t work out.

The statistics behind the curse.

While the third-generation curse is a well-known concept, quantifying how often it happens is difficult, especially when we look at individual families. However, studies have provided insight into the impact of generational wealth transfer.

• The National Center for Family Philanthropy reports that 90% of family wealth is lost by the third generation. This statistic highlights the importance of instilling financial literacy and discipline into the heirs of wealth.
• A 2021 study by the Boston College Center on Wealth and Philanthropy found that only about 30% of family businesses transition successfully to the third generation, with the remainder failing due to lack of preparedness, communication, and mismanagement.

These statistics underscore the difficulty of preserving wealth across generations, but they also show that it is possible to overcome the third-generation curse with careful planning.

How can you avoid the third-generation curse?

1. Financial education is key. One of the most important things you can do to prevent the third-generation curse is to teach your heirs how to manage money. If you’re building wealth, it’s crucial that future generations understand how you made your money and how to make smart financial decisions. This can be done through formal financial education, mentorship, and involving younger generations in financial discussions.
2. Create a solid estate plan. An estate plan that includes not only a will but also trusts, financial guidelines, and strategies for wealth distribution can help maintain wealth across generations. It ensures that the wealth you build is protected and distributed according to your wishes. Working with a financial planner or an estate attorney can help you set this up.
3. Involve heirs in financial decisions. Start early by involving the next generation in your wealth-building process. Show them how you make investment decisions, how to budget, and how to evaluate financial opportunities. If they understand the work and the strategy behind your wealth, they’ll be more likely to appreciate it and make good financial decisions themselves.
4. Create a family mission statement. A family mission statement that includes shared financial goals, values, and expectations can help maintain alignment among family members. This can help future generations maintain focus on wealth-building while also preserving the family’s values.

The bottom line.

The third-generation curse is a real phenomenon, but it’s not inevitable. With careful planning, open communication, and a focus on financial education, it’s possible to break the cycle and ensure that your wealth is preserved for future generations. If you’re working to build wealth for your family, it’s essential to start thinking about how that wealth will be passed down and how to ensure future generations have the knowledge and discipline to manage it.

For me, as I work toward building wealth, I’m thinking about how to make sure that the legacy I leave behind will last. Whether or not I end up having kids, I want to ensure that the financial foundation I’m building now will provide a lasting positive impact.