Wealth Easier To Pass Down Than Knowledge Best In Business Are Those Who Have To Work For It

Economic outpatient care (EOC) is widespread in America: More than 46 percent of the affluent in America give at least $15,000 worth of EOC annually to their adult children and/or grandchildren. Nearly half the adult children of the affluent who are under 35 years of age receive annual cash gifts from their parents.

Distributors of EOC often conclude that their adult children could not maintain a middle- or upper-middle-class high-consumption style without being subsidized. Consequently, an increasing number of families headed by the sons and daughters of the affluent are playing the role of successful members of the high-income-producing upper-middle class. Yet their lifestyle is a facade.

The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.

This is a statistically proven relationship. Yet many parents still think that their wealth can automatically transform their children into economically productive adults. They are wrong. Discipline and initiative can’t be purchased like automobiles or clothing off a rack.

A recent case study will help illustrate our point. A wealthy couple was determined to give their daughter, Ms. BPF, every advantage. So when Ms. BPF expressed some interest in starting a business, they responded in typical fashion: They created what they thought would be the ideal environment. First, they wanted her to be debt free. So they put up all the money for their daughter to start her business. Ms. BPF put up nothing of her own. She never even applied for a commercial loan.

Second, the parents felt a strong won’t pay off for kids in the end need to provide her with substantial economic outpatient care. They felt this would enhance their daughter’s chance of succeeding among the ranks of America’s entrepreneurs. Ms. BPF’s parents believed their adult daughter would benefit from living at home. This way Ms. BPF could put all her energy and resources into her business. She would live with her parents rent free. She would not have to allocate any time to shopping for groceries, cleaning the house, or even making her bed. This ultimate form of subsidy goes beyond economic outpatient care - call it economic inpatient care.

Is a rent-free environment ideal for a young entrepreneur? We don’t think so. Nor is the gift of a business. The most successful business owners are the ones who put much of their own resources behind their ventures. Many succeed because they HAVE to succeed. It’s their money, their product, their reputations. They have no safety net. They have no one else to rely upon for their success or failure.

Third, the parents of Ms. BPF added yet another element to the equation. What if their daughter did not have to worry initially about generating profits from her venture? They believed that reducing this burden would enhance their daughter’s probability for success. Her parents give her approximately $60,000 in cash and equivalents each year.

What is the result of having created this “ideal” environment? Today, Ms. BPF is in her late 30s. She still lives at home. She has no commercial-related debts. Her folks financed her business and continue to do so. Last year her business earned her nearly $50,000. Her parents continue to give her $60,000 every year. They still feel that Ms. BPF will become truly independent sometime in the future. We are not as optimistic as her parents in this regard.

Most successful entrepreneurs are not like Ms. BPF. How many entrepreneurs who are still in the start-up phase of their venture would do what Ms. BPF has recently done in one year?

Purchased a $45,000 automobile without shopping or negotiating the price or conditions.

Paid $5,000 for a watch, $2,000 for a suit and $600 for a pair of shoes.

Paid more than $20,000 for clothing in general.

Paid more than $7,000 for interest on credit card balances and revolving retail credit.

Paid more than $10,000 for dues/fees at area country clubs.

The answer is very few. Ms. BPF’s business is not really a success. It is heavily subsidized directly and indirectly via other people’s money. Actually, Ms. BPF has been shortchanged by her parents. She may never know if she could make it on her own. The “ideal” conditions they provided for their daughter were an incentive for her to spend heavily on consumer goods. All the while she gave her business stepchild treatment.

When we lecture about the relationship between cash gifts and economic achievement, people from the audience typically ask: “If not cash, then what form of gifts are more beneficial?” They are eager to learn how to enhance the economic productivity of their children. Here again, we remind them that teaching their children to be frugal is critical. Often those who are trained to be otherwise as children become adult hyperspenders, needing cash subsidies during their young and middle adult years.

What intergenerational transfers could help your children become economically productive adults? The affluent have a great appreciation for the value of a high-quality education. We asked millionaires if they agreed with the following statement: School/college learning is/was of little use to me in the real world of making a living.

Only 14 percent agreed; 6 percent had no opinion; and the balance, 80 percent, disagreed. That’s why millionaires spend a large amount of their resources on their children’s educations. What was the most frequently mentioned gift that millionaires received from their parents? Tuition!

All other economic gifts are mentioned by a significantly smaller proportion of millionaires. About one in three received some financial support in purchasing his first home; about one in five received an interest-free loan during his lifetime. Only one in 35 ever received funds from his parents for mortgage payments.

What can you give your children to enhance the probability that they will become economically productive adults? In addition to an education, create an environment that honors independent thoughts and deeds, cherishes individual achievements and rewards responsibility and leadership.

Yes, the best things in life are often free. Teach your own to live on their own. It’s much less costly financially, and, in the long run, it is in the best interest of both the children and their parents.

EXCERPTS This is the final installment of a three-part series by Thomas J. Stanley, Ph.D., and William D. Danko, Ph.D., excerpted from “The Millionaire Next Door” (Longstreet Press)