Wealth is a flash in the pan. After nine or ten generations of a free-market-like economy dominating the world economic scene, self-made wealth still outpaces generational wealth.
What the crap compounding interest? Aren't you supposed to be magical? Sadly, its not magical at all.
In fact, anyone who claims that compounding interest is magical undermines the very mechanism which makes passive investing possible. Explaining the mechanism is complex and boring. Instead, I'm going to use my story to explain why you'll never build generational wealth.
Self-made wealth- A first generation story
My grandfather was a little boy during the great depression. His father owned a general store and later a bank. Although Minnesota was not as affected by the great depression as much of the rest of the United States, my grandfather remembers struggling during the depression. He remembers receiving eggs (rather than money) in exchange for seeds and other farming supplies- everyone wanted to sell their eggs. Not many people wanted to buy them though.
His father extended credit to the community's farmers though he himself was in debt. My grandpa doesn't remember going cold (I assume he means colder than usual given that this was Minnesota) or hungry, but he remembers that his father feared going insolvent.
Eventually the business and the economy turned around (my grandpa credits his bicycle delivery service though nobody else does), and my grandpa went off to war. Apparently Hitler was so scared that the Cambridge boys were coming to town that he called off the war which explains why my grandpa never saw any action. According to military records, my grandpa was a "mechanic" on a ship. I say "mechanic" because anyone who knows my Grandpa knows that he can't fix anything. He probably did inventory.
After valiantly fighting the disorganization of a naval vessel, my grandpa went off to college, and somehow convinced my grandma marry him. This is actually a very cute story, but one that I can't go into today.
Then they started businesses. Lots of businesses. A furniture store, commercial and farm real estate, a printing company, an advertising circular (which will come up later), a mattress store. Like I said, lots of businesses. Some were more successful than others, but over the course of their lifetime my grandparents grew wealthy. Really, it was my grandpa starting the businesses, but my grandma supported him every step of the tumultuous journey.
By the way, my grandparents are still alive, but my grandpa has stopped starting new businesses. They also got their estate plan squared away (which my grandpa tells me is a great relief because for a while it seemed like he would die before they got around to that).
Self-made wealth- A second generation story
My grandparents sent all three of their kids to college, and two even graduated. The kids became two school teachers and a truck driver which would have been a great way for us to prove the power of generational wealth, but my dad found that he didn't like being a teacher, and my aunt married a finance guy. My uncle (the finance guy) convinced my dad to buy the advertising circular from my Grandpa. Together they built a new company.
The business struggled for a while, and its gone through boom and bust cycles. I remember being young and asking my dad if he would lose his job. He said he had no risk of losing his job, only of not making any money. What a relief.
Now the business is much bigger and much more profitable than when it first began. My dad won an entrepreneurship award a few years back. His nomination was on the premise that the company was (and is) a great place to work. In case you're wondering why my Uncle wasn't nominated its because his role in the company is now "Dream Manager."
My dad and uncle's company is probably worth more than my grandparent's estate (just a guess- I haven't seen the real numbers), though I'm not sure if that's because my grandparents have given so much away or if my dad/uncle have particularly great business acumen.
Either way, their wealth is definitely considered self-made, even though its impossible to look at the company they've built and not see my grandpa in it.
Self-made wealth- A third generation story
Now the story brings us to my generation. My grandparents have 10 grandchildren (Age 19-29), and 8 great-grandchildren (well counting my unborn great-grandchild). While my grandparents paid for our college education, our wealth still qualifies as self-made according to any statistical measure.
Unfortunately for generational wealth, every single one of us is gainfully employed, and several of us aspire to starting our own businesses. Once again, it seems that "generational wealth" will be thwarted.
I mean, we're practically landed gentry, and no statistic is brave enough to tell us we've inherited our wealth. And to be honest, we haven't, or, more accurately, we haven't inherited money.
Why you'll never build generational wealth
If you intend to become so wealthy that you pass an inheritance to your kids, then you've got some pretty amazing skills. Not only that, it seems that you love your children. Since you love your children, you're probably going to do them one better than passing on cold hard cash. You're probably going to teach them how to generate wealth on their own.
Of course, you could teach them to generate wealth through passive investments, but more likely you'll teach them to take advantage of inefficiencies in the marketplace to add value. Because, let's be honest here, that's what wealthy people do. You might even give them the crazy advantage of a college degree, so that they can screw up somebody else's empire before striking out on their own.
Rich parents teach their kids that creating wealth is a dynamic process. They teach their kids that businesses and conglomerates fail when they attempt to rest on their laurels. They teach their kids about decision making and creative destruction and smart risk taking.
But do you want to know what the best rich parents do? They don't force their kids to become rich too.
The best rich parents are pleased when their kids join the peace corps or the mission field, teach underprivileged kids in the mountains or live as a starving artist. Rich parents are pleased when their kids make choices that demonstrate that they aren't putting their hope in the uncertainties of wealth, even if it means that the family business will be sold, and the wealth dissipates. All of this is possible because rich people know that money does not buy true and lasting joy.
I'm a wife, a mom, an employee, and a personal finance nerd who is devoted to spreadsheeting my way through life.