Personal Finance Part 26 – Wealth Cannot Last More Than 3 Generations

The above title represents a very intriguing concept which has been known to the Chinese for millennium, and there is even a Chinese Idiom which states so “Fu Bu Guo San Dai”. Interestingly, while reading “Millionaire Teacher” written by Andrew Hallam (a new book written on investing and personal finance, written by middle-class millionaire teacher Andrew Hallam), I also discovered that he had written about the exact same phrase, though he did not elaborate too much about it. Basically, this teaches us that wealth earned by the first generation can seldom, if ever, last past three generations. The reason for this is so obvious in its simplicity that it is surprising that most adults fail to grasp it – money which is not “earned” tends to be squandered. How does this fit into personal finance? A lot can be learnt about how people behave under various circumstances, and I will illustrate my point using this phrase as a backup; to also show evidence of how parents should teach their own children about money. Granted, it is not easy to “break the cycle” and prove an age-old adage wrong, but there’s no harm in trying to inculcate the right values in the younger generation from an early age.

The First Generation – Wealth Building

The first generation would represent, in most cases, the generation which possessed the highest degree of entrepreneurial spirit, and who believed in hard work, sweat and effort. Most of these people came from a faraway land (e.g. China, India) and arrived in Singapore with hardly a penny to their name, and worked as coolies or labourers doing menial tasks. The hard life made many of them strive to break free of their “bondage” and many of them undertook risks to start businesses in order to achieve freedom from their manual labour. Of course, many of them failed and disappeared into oblivion, but those who survived thrived and grew their businesses and eventually became very rich as a result. However, their frugal habits which were cultivated from their days as hard labourers stayed with them, and because they understood the value of their hard work, sweat and tears, there was also an appreciation of the wealth they had painstakingly accumulated.

Another class of successful first-generation wealth-builders are those who subsisted on a fixed salary (i.e. salaried employees), but who were prudent in spending, saved and invested throughout their lives to accumulate a substantial nest egg. Although these people did not run businesses or make breakthrough products like the iPhone, they nevertheless also understood the value of a dollar earned because they put in considerable effort in their day job, and now have the financial means to enjoy their olden years without having to slog like a dog. The same theme can be picked up here as well – hard work, effort and appreciation of a dollar earned will go towards building long-lasting wealth. These are the people who worked hard to get where they are, who appreciate every last dollar they own; and will never let anything or anyone ruin their plans for a comfortable retirement.

Just for the record, these people usually consist of those who came from the 1900’s to the 1940’s, who had seen Singapore’s rise as an entrepot trade centre to an economic powerhouse, and who had grown along with the country as well. They were our forefathers (grandparents and great-grandparents) who slogged hard and lived in an environment where there was little financial security, unlike what the young are enjoying today.

The Second Generation – Wealth Maintenance

Along came the second generation, which consists mainly of people born in the 50’s and 60’s (the baby boomers). These were the direct descendants of the entrepreneurs and businessmen, and grew up during the years after the World Wars, and who also experienced Singapore’s transformation into an economic miracle. These are the folk who grew up witnessing how their parents slogged to become who are they are now (successful people), and they may also have chipped into help their parents out in the business. However, not being the founders themselves, they would not have the same kind of emotional attachment to grow the business as their parents did. This is not to say that they do not have the competence to manage and grow the business, but they may never attain the same level of passion for the business as their parents did. In fact, there have also been known cases of children who refused to carry on their parents’ trade, and who chose a different career path; thus the business empire had to be taken on by “outsiders”, who would not have the same kind of loyalty to the business as blood kin. Other more stark examples may include a skilled Char Kway Teow hawker whose son is much more educated and does not wish to carry on this “menial” job, but instead prefers to pick up a pen to do accounting or law (I have heard of such cases by speaking personally to older hawkers in Singapore – this is why there is less and less great Hawker Food!).

So assuming in cases where the parents had built up a huge business empire and created massive amounts of wealth, the baby boomers simply had to maintain it and ensure it did not flow down the toilet bowl. This was somewhat easy as they had a direct hand in managing the business (in some cases), while in other cases where they did not, they had witnessed first-hand what their fathers and mothers had been through, and thus understood the importance of ensuring the wealth was retained, and not squandered. This is the so-called second generation effect – they help to maintain the wealth which was built up by the first generation. So far so good. Now let’s come to the third generation – Generation X and Y.

The Third Generation – Wealth Depletion

The third generation, affectionately known as Generation X and Y (born in 1970s to 1980s; and 1990’s to 2000’s) are the most blessed generation. They were born when Singapore was stable (after having broken away from Malaysia) and was on solid economic footing, with a strong Government (PAP) and sturdy policies. There was political stability, economic security and financial stability as well. Most of us (yes, myself included) grew up in an environment where we did not have to struggle and go hungry, where education was widely available, and where material pleasures were readily available (with a new invention called the Credit Card, no doubt). Therefore, this generation has also been given the label “Strawberry Generation” – looks good on the outside, but cannot last when encountering adversity. Because of the inherent stability in our lives and the lack of a push factor to strive hard and achieve, the spirit of entrepreneurship has all but died out and many of us are relegated to salaried jobs earning a fixed income which keeps us happy and contented.

It is this generation which is responsible for poor financial habits and for squandering away the wealth built up and maintained by the preceding two generations. Most of Generation X and Y were relatively insulated from the day to day operations of the business, and add to that the fact that parents (the baby boomers) were also over-indulgent in wanting to ensure their children lived a comfortable life; so much so that they provided too much of a comfortable life for this generation. Without the need to strive hard, this generation thus lacked the necessary appreciation of money and how hard it is to earn it, and proceeded to spend lavishly and wantonly. An easy supply of money coming from two previous generations also fuels this habit and exacerbates the careless (and callous) attitude in which this generation frivolously fritters away the wealth built up over 50-60 years.

While it might be a bit of an exaggeration in terms of my description of how the current generation behaves (for of course, there are also shining examples of youths who grasped the concept of delayed gratification and appreciate the value of hard-earned dollars), there have been ample examples in the newspapers over the years (yes, I can find examples stretching from 2003 till now) which serve to demonstrate, anecdotally, how the current generation has a higher tendency than the previous two to spend excessively and without due consideration.

I have read reports of fathers who spend lavishly on their children, buying them anything from branded goods to cars to the latest gadgets. With such constant pampering, it is no fault of the child that they grow up to be completely spoilt adults who are used to getting their own way, whether or not they have the financial means for it. A life hooked on materialism and on borrowed money (credit cards and loans), while living paycheck to paycheck, seems to be what errant parents have set up for their kids.

Lessons Learnt

I guess one can already tell what the moral of this post is – how to inculcate the proper financial habits and value system within a generation who is unused to struggle and hard work. For all of us aspiring parents or those who are already parents of young toddlers, make sure they understand the value of money. There are actually many websites which give advice on how to educate children about money, and to ensure they treasure it and appreciate it from a young age. Now that we are already moving into the fourth generation (Generation Z they are called), it is extremely important to educate them well financially so that the wealth depletion and drainage stops before it gets worse.

Of course, those parents who are already financial wrecks themselves are hardly in a good position to impart prudent values to their children, but perhaps this post also serves as a wake-up call for those who may be exhibiting poor financial discipline. If your lifestyle is ostentatious and you have poor money habits, it is perhaps a good time to sit down and review your finances and to ask yourself if you need some proper financial education. Call it self-discovery and soul-searching, if you will.

For parents who may have teenage children, do yourself a favour and stop the pampering. The key is to be like Warren Buffett – he believes in giving his children just enough so that they can do anything they want, yet not an excessive amount such that they do not need to do anything at all (i.e. sit on your butt all day, watch television and spend money). And we are talking about one of the richest men on the planet! If parents consistently help their kids to pay off their student loans, purchase cars for them, buy branded items and gadgets for them whenever they request, then there is simply no incentive for the young adult to work hard for these items and to manage their financial life. So the only way to “teach” is to let them pay for everything on their own – this not only builds discipline and perseverance, but also teaches the value of delayed gratification, striving hard and saving for what you desire and plays down the materialistic instinct residing in us. Over the long-term, this will definitely do more good than harm.