“The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.” - The Millionaire Next Door
Whilst reading through The Millionaire Next Door , this quote is what stood out the most.
People have been toting the phrase “the generational wealth gap” for decades. They say that wealth begets wealth and that the poor cannot compete. Why then does this book that was written over 30 years ago say that the opposite is true? And why does it resonate so much with me?
Throughout my adult life, I’ve always been quick to commit myself to thrift. It didn’t take me long to realise that this was due to being raised in a low income family. Because of this, I went into the world of work knowing that happiness can be obtained without a big price tag. When my income grew substantially, I quickly discovered that increased spending didn’t necessarily correlate to an increase in happiness. In fact, I discovered that spending less can sometimes make you happier.
But what would have happened if I grew up in a high consumption household? Would I be stuck in an endless hyper-consumer loop for the rest of my days? I would have never known happiness without consumption, how would I know that there is an alternate, much better way to bring myself joy? This difference in my life may well have slowed down my current Financial Independence trajectory, or even halted it completely.
The book goes into more details below.
“Consider for a moment that you are a typical affluent parent. You noted that your oldest son or daughter even at an early age was extremely independent, achievement-orientated, and well disciplined. Your instinct is to nurture these traits by not trying to control his or her decisions. Instead, you spend more time helping your less resourceful child make decisions, or you actually make decisions for him. With what result? You strengthen the strong child and weaken the weak.”
This book analyses hundreds of millionaires and the main mantra throughout is that the vast majority of these people were the first in their generation to accumulate this amount of wealth. They made their millions by being frugal, determined, and in a lot of cases, through necessity. These millionaires had a much better gift from their parents than money, they were taught thrift, discipline, and most importantly: how to fend for themselves. Everything that they wanted to achieve, they needed to obtain it on their own.
“Discipline and initiative can’t be purchased like automobiles or clothing off a rack.”
A lot of affluent parents tend to give large donations to their children to try and help them start a successful business or pay off their yearly expenses. What they don’t realise is that they are actually hindering them. Success and wealth is manifested within individuals that need to work hard in order to achieve something, generous donations cause these traits to dwindle and die.
A large contributor to the success of a business is the risk of failing. If you need something to succeed, you are bound to work a lot harder in order to ensure that it definitely does.
Risk is what has fueled some of the most successful companies of our time. Who do you think is more likely to fail? The entrepreneur who had £50k gifted to them by their parents, or the business owner that had to remortgaged their family home for this sum?
“Suppose you have a ten-year-old child who goes in for a physical checkup. The examining physician tells you that your son or daughter is underweight and underdeveloped. How would you respond to this evaluation? You would find ways to improve your child’s physical health. You would likely encourage your child to exercise, take vitamins, life weights, and perhaps play sports. Most parents would attack such a problem proactively. Wouldn’t you find it odd if the parent took the opposite course? How would you respond if the parent encouraged his child to eat less and exercise less?”
I have seen these mistakes manifested within my own life. My partner is the middle child of three children. Her parents, still happily together, were raised along the poverty line. This lifestyle prompted her father to work hard to create a better life for himself and his family. He never shied away from staying up late and, with determination, he came to own a multi-million pound business later in his life.
My partner has always been the more independent child of the three, working three jobs in her teenage years, she never accepted money from her parents. She left home at 18 to get a degree and never moved back. But what has happened to her brothers?
Her eldest brother, of three years, let’s call him Luke:
Luke was somewhat on the same trajectory as her sister. In his younger years, always working whilst he was a teen, showing traits of discipline and determination. He, however, struggled in high school. Not achieving good grades, his father, who had started prospering in the business world, wanted his son to be successful. So he thought he would make use of his status as CEO and hire his wayward son as an upper Manager of his business. “This will help give him a start with his career.” He thought.
What did happen? Now, 12 years on, the Dad, being his boss as well as his father, felt he owed it to his son to give him bonuses, continue to pay for his meals and holidays, and a lot of other expenses. This created a bubble of wealth around Luke, he had it good, why would he ever want to leave?
Luke stayed at home rent free until he was 28. He then moved out into rented accomodation with a friend. He still works for his father. He’s been ‘fired’ and bought back 2 times due to always being late to work or not coming in. He’s turned into a prodigious consumer, always moving on from hobby to hobby, spending all of his money on new things and holidays. He is the type of person who preaches that he’ll never own a mortgage. ‘Mort’ means death in French he says, you’ll never pay it off until you die.
His father is now worried about Luke, he’s starting the process of selling his company and retiring, but he’s having second thoughts because he doesn’t want his son to lose his job. If he did get fired for good, he doesn’t think he’ll be able to cope on his own.
What Luke doesn’t realise is that when his father ‘gifted’ him with that upper management position all of those years ago, he took away his independence, his motivation, and his own life. We’ll now never know what Luke could have become on his own. His father is already discussing giving more of an inheritance to Luke as he “helped him with his business”, but really it’s because he’s worried about him. What he doesn’t realise is that he’s continuing to strengthen the strong children and weaken the weak.
Things aren’t going so well for my partners younger brother either. Being the youngest by 7 years, he was born into a life of true wealth. Let’s call him Timmy…
Timmy is what you might call a spoilt child. Growing up, his parents doted on his every whim, instantly buying him whatever he asked for. Failing at school due to not wanting to spend his time at home studying, his parents decided to move him into a £5000 per term private school for his last 2 years. “Surely he will achieve better grades here?” They thought.
They were unfortunately wrong, money doesn’t buy good grades. He failed secondary school and had to spend an additional 2 years re-taking his core GCSEs. After passing with C’s he eventually decided that he would take an NVQ in ‘outdoor activities’, like his brother he enjoyed many different expensive hobbies, so why not take a course doing what he liked doing?
Throughout this time his father was trying to convince both him and his brother to start an outdoor activities business. He said he would fund it and buy the land, he desperately wanted them to be independent and happy. But Timmy and Luke didn’t have the motivation to commit to such a task, it would require so much effort!
In recent days Timmy decided that he wanted to go into videography after his father spent over £2000 on a drone and a ludicrously expensive camera. He’s not had any clients yet but his father has also recently spent over £5000 on an Intel Xeon computer for his son and his video editing, he asked for the most expensive PC in the shop, only the best for him!
What do you think is going to happen to Timmy? In all likeliness, his new venture will fail. As soon as he gets bored of this hobby, he’ll move onto the next one. His father has sucked out any bit of determination that ever manifested in Timmy by providing an environment that doesn’t require him to ever have any. He wrongly assumes that money is the answer, when in fact it is discipline and independence that Timmy needs. I fear, like his brother, it is now too late for Timmy to find his own path.
So, what has this book taught us?
For me, it affirmed what I have been thinking about for a long time; that you should be very careful when giving money to your children, as if it is done incorrectly, it will damage them.
I plan to send my kids to public school and I intend to never give them anything, they will have to earn what they get. Instead, I will use the saved wealth to spend more time with them, to give them quality experiences and to teach them how to become independent, disciplined, and strong human beings.