(Note: This article was originally published to JamieMcSloy.co.uk on September 24th, 2019. I’m going through an old backup of the site, which has hundreds of posts that aren’t currently uploaded. As I’m working hard on updating the site, letting these old posts be the daily posts for a while.)
On Building and Maintaining Generational Wealth
Here’s another adaptation from a Twitter thread that went long earlier today. It’s on generational wealth, and once again, I’ve separated it into sections so the regular Gentlemen of Fortune get all the hidden stuff we talk about in their relevant sections.
Let’s have a thread on generational wealth.
Note before we start: I don’t come from generational wealth at all.
Two sources; watching families who’ve built, and studying families who’ve kept generational wealth.
Let’s go.
First Things First…
First off, you have to separate these two things:
1. Building generational wealth
2. Keeping/making wealth generational
Those two things are very different and operate differently with different challenges.
Building Generational Wealth: Starting from Zero
An Indian family near where I grew up have built generational wealth. They started from zero.
Here’s what they did.
First generation = migrants/peasants.
(Most of us start here. Peasants = system-serfs with no particular education, connections or wealth benefits. And I don’t mean you’ve got a degree. If you’re a working class/middle-class and a traditional “career” is your option, you’re here really.)
This generation works HARD and does whatever it takes to build the capital necessary.
If you have no money, you should do whatever, and you save as much as you can.
Ultimately, your goal here is to secure your financial future, and if you’re starting at zero, that involves building as big a pot as you can. Usually there are a few things that also happen here:
- Wealth pooled across family lines (generational wealth is totally a tribal business and anyone who disagrees is basically an idiot.)
- Multiple jobs
- Entrepreneurship
To expand on each of these.
Tribalism
If you and your brothers (for example) all make £10k a year it’s better to share a house and save 80% than it is to rent 5 houses and be no better off.
After one year… you have a pool of £40k. After 5, £200k.
The figures don’t change whether you’re earning £10k or £20k or £100k. The point is you’re pooling wealth in a tribal fashion. This allows you to do the following steps.
Multiple Jobs
First generation don’t have a profession ever.
Their loyalty is in pooling of the resources. If they can work 3 jobs, they work 3 jobs.
You’re building that reserve. You need it because…
All first generation peasants who get out do so via some form of entrepreneurship.
Entrepreneurship
Rothschild started as a silk trader. The Kennedy Granddaddy was a bootleg alcohol gangster. (legality – maybe more on that later in thread.)
With family pooling, you can start multiple businesses in one generation.
Remember, everyone works where needed. You might have a restaurant, a corner shop, a garage and a couple of convenience stores. You wait tables if that’s what’s needed in the evenings and in the morning you work retail. It’s all about the pot of gold that keeps building.
This is generation one. Moving into generation two.
Generation Two
Generation two starts early. The kids work in the trade/business. They don’t usually stay there.
As family pools businesses, new angles/capital/opportunities appear.
For Rothschilds, 2nd Gen Amschel started taking IOUs for family business, and soon they were money lenders.
Anyway, the point is that 2nd gen kids start young. It’s helping unload cargo and working the shop floor and training them for family business.
Then with that experience, 1st generation send them off for an education that they never got.
2nd gen are often better educated which helps the family business as the primary goal. It gets the family business into expanded and affluent social circles.
In some cases, allows them to build barriers to entry so that they can maintain their wealth later.
Professions; lawyer, accountant, tax specialists, doctors, etc.
Worth noting: the families I’ve known who do this are still living mostly under the same roof at this point. 3 generation households are common, even when you’ve got multiple business interests and kids earning middle-class salaries.
Why?
Because the pooling continues – and the money gets invested back into real estate, other businesses and interests.
The 2nd gen+ move out into rentals their parents own – so they can continue to pool the wealth.
That’s basically how generational wealth is created.
An aside before we move into keeping it that way.
On Legality
Most generational wealth is gained in unscrupulous fashion. Not immorally per se., but amorally.
A lot of businesses of the first generation target underserved communities (in case of migrants,) dubiously legal (e.g. Kennedys and Mafia) or otherwise cash-based business (think builders, laundromats, etc.)
Cash-based business means a lot goes under the table and a lot is unregulated and so on.
It’s not the be-all and end-all, but it’s worth noting because it often plays a key part.
Let’s move on.
Making Wealth Generational
The hope is that you continue the practice of putting your kids to work in the family business and keep expanding.
A couple of problems with that:
1. Families get big very quickly.
2. You might have idiot kids.
The 2nd is the big issue with plan.
“Idiot kids” refers to the fact that after a couple of generations, the kids are growing up in comfort and don’t keep the necessary skills.
A middle-class kid with a trust fund probably ISN’T going to mop floors in a dingy restaurant – but that’s what builds wealth.
And the problem really is that if you can’t continually generate wealth, eventually the coffers are emptied.
It might take one generation or ten generations, but the pot goes down.
Most generational-wealth families do this:
By this point, most of the money is tied up in businesses. Hire out the running and make sure the dopey kids don’t have any ownership of the money.
The pool is an independent entity and they get a dividend to live off.
Secondly; you put the less-dopey kids in places where they can’t fail.
Eton > Oxford > Political Science > Think tank or
Army > Officer > Private Contract
Harvard > MBA > Wall Street
And so on.
The kids have capital + connections and that’s all you can do.
Luckily for the rich, it pools at top… for now.
The Future Ain’t What It Used To Be…
There’s a final hidden element which is the interesting one.
If your great-grandchildren are in the above situation because you’ve read this article (you’re welcome, by the way,); they have to deal with the world changing.
For past 200 years, accumulate capital+invest in future business and new markets has been viable.
However…
Give it a couple of generations; maybe this won’t be the case.
There’s nowhere to emigrate to; most markets are globalised. Most places which are viable are already being capitalised; in my lifetime, we’ve gone from China as the manufacturing base to Vietnam to Cambodia. The arbitrage is running out of space and the logistics aren’t worth the cost; hence we’re seeing environmentalism and a return to “Made in the UK/USA/etc.”
Unless Elon and the Gang get their space mining tech going, we’re entering Global Late Stage Capitalism.
The money is pooling at the top and this is calcifying.
You also have the world population hitting unsustainable levels, ecological conditions of the planet nosediving, and the global monoculture I’m always talking about
These are issues your descendants will deal with.
You need your wealth to survive these.
This is the reality your grandchildren will face, and as you can imagine, it’s hard enough to tell what we’re going to do in the next few years. Estimating 50-100 years out is nigh-on impossible.
But be under no illusions… this is what the generational wealth brigade are thinking about.
More on this to come.