THE GREATEST WEALTH TRANSFER IN HISTORY: PREPARING FUTURE GENERATIONS

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We are in the midst of the greatest wealth transfer in history and there are two forces at work:

1) Baby Boomers
2) Economic Stimulus

Baby Boomers (born between 1944 and 1964) are expected to transfer $30 trillion in wealth to younger generations over the next several years as many pass on their businesses or simply pass on.

Add to that the economic stimulus launched in response to the COVID-19 induced downturn that is injecting trillions of dollars into the economy and you have the greatest transfer of wealth in history.

If the past is any indication, one thing is certain to happen as a result of this wealth transfer and that is all that money will eventually end up in the hands of those industrious entrepreneurs who put that money to work. Money doesn’t like to sit idle.

The sad truth about wealth transfer is that most of the people on the receiving end will squander their money. Instead of spending that money on productive assets, they’ll spend it on diminishing assets that erode wealth instead of creating it. This idea is backed by a Williams Group wealth consultancy study that found that 70% of wealthy families lose their wealth by the second generation, and 90% by the third.

What about that small percent of heirs that don’t squander their wealth? What did they do differently? What did their predecessors teach them to ensure the continuation of their wealth?

What can we learn from those wealthy individuals who successfully created multi-generational wealth and taught their heirs to preserve it?

Put your money in productive assets.

A productive asset is an asset that gives you back more than you put into it. Think of a business that sells goods or services, commercial real estate that collects rent, oil & gas that produce fuel, and productive agricultural assets.

The more productive an asset, the higher the returns. Think of a productive asset like a machine that gives you back $2 for every $1 you put in. That’s a valuable machine that other people will want to get their hands on.

Over time, as this machine produces more and more wealth – proving its consistency and reliability – people will be willing to pay more and more for it, which will drive up its value and price on the market.

What’s the difference between a productive asset machine and a diminishing asset machine? When you put money in a diminishing asset machine, you get back less than you put in. Think of a new car, fancy clothes, toys, vacations.

There’s another machine that many people put their wealth in that destroys wealth and that’s a speculative machine. With a speculative machine, there’s no consistency of returns. It depends on the mood of the machine. One day you can put $1 in and get back $2, but 90% of the other times you put in $1 you get back less and sometimes nothing.

Speculative machines operate purely on what the next person is willing to pay for your asset. Depending on the mood of the market, this could be more than what you paid or, in most cases, it could be less. Examples of speculative assets are common stock, cryptocurrency, gold, etc.

As you can see, the two main differences between productive assets and the other two types of assets – diminishing and speculative – is that productive assets generate consistent cash flow and that they appreciate over time, providing two sources for growing wealth.

What is the one great lesson you can teach your heirs for preserving and growing wealth?

Put your money in productive assets.

Remind your heirs that when investing in productive assets to keep the following in mind:

  • The more they save by spending less or making more in their day jobs, the more they can put into a productive asset to generate wealth through income and appreciation.
  • The more machines (productive assets) they have, the more income they can reinvest to build exponential wealth.
  • The more machines they have, the better prepared they’ll be for a recession because if one machine slows down, the others will continue to produce – ensuring continued cash flow to meet their needs.

Don’t underestimate the power of leading by example.

A recent article in The Atlantic noted that when it comes to choosing professions, children often follow in their parents’ footsteps. “Doctors’ children often become doctors, lawyers produce lawyers, and plumbers beget plumbers.”

Parents who spend money frivolously and foolishly will raise children who do the same thing. Parents who are wise with their money and put it in productive assets will raise children who follow by example. The Hiltons and Marriotts will have heirs to carry on their hotel empires.

On the flip side, the Vanderbilts, once one of the wealthiest families in America, now does not have a single millionaire in its bloodline. The Vanderbilt patriarch didn’t pass down a legacy of self-sufficiency onto his heirs. He passed down a legacy of entitlement.

It’s never too early to teach simple financial lessons.

Teach your heirs from a young age to:

  • Save to invest.
  • Put money in things that will give back and not in things that don’t give back. You can’t afford to just impress your friends.
  • Don’t spend more than you make.
  • Avoid the use of unsecured credit.
  • Sacrificing now will lead to a better result later.
  • Soak up knowledge on ways to grow your money.

The great wealth transfer will move money into the hands of those who respect it for its productive attributes – those who put it to work. Money wants to go to work to attract more money. It doesn’t want to sit in a garage or a closet and deteriorate. Ask your heirs if they want to be the ones attracting that money or if they want to be the ones chasing it away by squandering it.

Teach your heirs to invest their money in productive appreciating assets like commercial real estate, cash-flowing businesses, productive oil & gas, agriculture, etc. to generate income and that will grow over time – giving them a double source for growing wealth. This will ensure they are on the right side of this great wealth transfer.

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