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Legacy of A Generation… Not the Millionaire Next Door

Sometimes individuals have those moments where they wake up in the middle of the night, and it hits them! It’s that thought, or idea, or realization that is so thought-provoking and so revolutionary that they can’t shake it. This is what happened to me a few nights ago!

I started thinking about the economy (as I often do) and about where the markets are currently and where they could possibly be heading. Are we in the recovery? Have the markets settled back into a nice equilibrium? If we are starting a steady upward movement, how is that possible when one considers all of the government obligations and the health of our overall financial system? What about Social Security, Medicare, and the trillions of dollars of debt?

After trying to wrap my head around all of these moving parts and complex systems, I honestly got angry! So then, rather than focusing on the uncertainty and confusion, I shifted my thinking to how did we get into this mess? And I’m not talking about excessive leverage, credit default swaps, black box investing, short-selling, crazy mortgage products, sub prime, or any number of ‘reasons’ for this financial turmoil. I wanted to figure out on a macro level, how in the world did we get here? How did we let America the Beautiful get here?

Then it hit me, and I mean it hit me like a ton of bricks! At first I got mad about how political our country has become, but then I realized that the partisanship is just smoke! Republican, Democrat, left, right… it is all smoke! The fire is actually something very very different! I want to go ahead and warn you, however, this theory and these thoughts are controversial, and it will not surprise me one bit if this upsets some of you. BUT, I think if you take a step back, and remove your individual self from the equation, you will realize how eye-opening this realization is!

As I was thinking and studying, I began to realize that there are some incredible correlations between the generations of the last 100 years and the cycle of personal wealth. Due to my background of working with wealthy individuals and managing wealth in general, I feel that I am uniquely qualified to make this connection.

Before you can truly understand what I am talking about, though, you need to understand what successful individuals have in common. It is these exact same principles that made us extremely successful and prosperous as a country. As you listen to the show, I will read a few excerpts from the bestselling book The Millionaire Next Door including this one:

“The large majority of these millionaires are not the descendants of the Rockefellers or Vanderbilts. More than 80 percent are ordinary people who have accumulated their wealth in one generation. They did it slowly, steadily, without signing a multimillion-dollar contract with the Yankees, without winning the lottery, without becoming the next Mick Jagger. Windfalls make great headlines, but such occurrences are rare. In the course of an adult’s lifetime, the probability of becoming wealthy via such paths in lower than one in four thousand. Contrast these odds with the proportion of American households (3.5 per one hundred) in the $1 million and over net worth category.”

As this passage describes, 80 percent of millionaires are first generation. So, with that being the case, what happens to the family fortunes? As you listen, I share a great case study that I think will help you understand exactly where that wealth goes.

‘But Brian, what in the world does this have to do with the economy, how our country got into the mess, and more importantly, what does this have to do with me?’ Well, I thought you would never ask 🙂

I want you for a second to think about the ‘Depression-Era’ generation. What were some of their common characteristics? They lived well below thier means and wanted their children to have a better life. But what did this ‘better life’ mean? Well, for most of them, it meant they wanted their children to live in fine homes and have a life style of consumption. HOWEVER, while working hard and saving and trying to make the world better for the next generation, that younger generation (the Baby Boomers) forgot or neglected to remember the elements that were the very foundation of what their parents built (aka the amazing and innovative powerhouse country of the United States). These baby boomers came to a point where they wanted to reject the life style of thrift they had grown up in and were no longer willing to subject themselves to a self-imposed environment of scarcity.

So then what were some traits common to this Baby Boomer generation? They lived lives with high levels of consumption, were under accumulators of wealth, subscribed to ‘head in the sand’ policies, and have somehow developed this idea of leaving the next generation to pick up the pieces. Somewhere along the line, individuals in the ‘Baby Boom’ generation lost the foundation that their parents subscribed to that allowed them to build this country to what it has become.

So how does this relate to wealthy families? In many cases (and not all, I know, there are absolutely some exceptions out there) the first generation builds the wealth, then the second and third generation blow through it. I can’t help but feel like that is EXACTLY what has gone on in America. The older generation, aka Depression-Era, lived below their means and had an amazing work ethic and built wealth and a wealthy country. Now, nearly two generations later, it would appear as though that wealth has been squandered.

What can we do to change it? My thought is that we can return to those same ideals that originally made this country great! We can begin to save for the future, live below are means, and defer gratification into future time periods. But I also want this to be a movement! I want to know what you think about this topic. Let’s turn this weeks show into a forum for discussion, whether you agree or disagree, leave a comment and lets see if we can come up with some effective ways to make a change!

Reader Interactions

Comments

  1. What fuels the current generation’s debt is best addressed in the Atlantic Monthly Article entitled “A Politics of Generation X”…..

    “Since 1973, while the earnings of older Americans have mostly stagnated, real median weekly earnings for men aged twenty to thirty-four have fallen by almost a third. In fact, Xers may well be the first generation whose lifetime earnings will be less than their parents’. Already they have the weakest middle class of any generation born in this century.”

    No surprise when the article later explains….

    “Xers carry more personal debt than did any other generation at their age in our nation’s history; in fact, a full 60 percent of Xers carry credit-card balances from month to month. In addition, those who attend college face the dual burden of soaring tuition bills and shrinking federal education grants. From 1977 to 1997 the median student-loan debt has climbed from $2,000 to $15,000. The combination of lower wages and overleveraged lifestyles is doubly worrisome to a generation that wonders if it will ever collect Social Security.”

    The good news – This generation of Xer’s (of which I am not one being that I am 47), is more politically complex and financially astutue than all past generations. They are the voice behind democratic fiscal conservatism (a paradox?), the near success of Ross Perot, and the ever louder voice of the libertarian party. In time, the present political forces that have contributed to the culture of consumption and dept will be displaced by those who understand, represent, and ultimately repair financially destructive forces of my generation and those before me. Unfortunately, it will not come without long deferred gratification….or not. Maybe the gratification comes from cleaning up the mess and living more simply. There is something to be said of a minimalistic lifestyle. Particularly if it leads to millionaire status.

  2. Your Legacy of a Generation was very well presented and thought out! Please keep hammering this home to America! Thanks!

  3. Brian, you really made a great point about making math and science cool again. In my opinion, the single biggest “professional” flaw causing the credit crisis was the engineers trying to become financial wizards. Instead of these people using their talents to create great products and widgets, they saw the possibility of huge returns through financial engineering. Instead of finance becoming a way to monitor and fund the activities to create wealth, finance became a way to create wealth in its own right.

    The explosion of engineering models in finance was incredible. Too many engineering majors thought they could apply their thoughts to create risk-free investing tools. Business and finance is not black and white like some (but certainly not all) engineers think the world is. When the “long-tail” events occurred because of human error (something that is not factored into many engineering analyses), the crisis began to accelerate.

    I do not mean to pick on engineers. My brother is a future civil and structural engineer, and there are many brilliant minds in the field. My point is that instead of applying their unique talent to build great products or improve great services, too many engineers tried to get rich quickly in the financial world. Since human decisions cannot be accurately predicted by a model, the idea of risk-free financial models and instruments was doomed from the start. The rising stock market and real estate market simply masked the inevitable fall that we all should have realized was coming.

  4. I couldn’t agree more with you, Brian.

    I continually strive to live below my means as well as save 20% of my income – one “trick” that I use to save is what I refer to as the “because I’m alive” tax (Every day, I put aside $20 in a high-yield savings account “because I’m still alive”). By doing this day-in and day-out at least for the next 30 years, I will amass quite a tidy sum of money. I look at the concept of saving money as a game rather than a chore – every day, I eagerly and willingly look for new ways to save money.

    For people who have not yet made the decision to save money and live below their means, I implore you to start being fiscally responsible as soon as you can – the world does not owe you a living.

  5. Bryan,

    I think over consumption in America is a much more complex problem with a lot more subtle causes. The prevalence and effectiveness of marketing has changed dramatically in the last century and the entire purpose of marketing is to increase consumption! I think television has also distorted our culture- who wants to watch the lifestyles of the poor and unknown instead of the rich and famous? The stories of superstars are much more dramatic and interesting than the boring toils of simple businessmen. I am sure that television has distorted Americans’ concept of “normal” across many aspects of life- from careers, to money, to morals. If the air time for uninteresting professions is minimal is it any wonder that kids want to be sporting or music stars? When everyone you see on TV has wonderful things, doesn’t it make you questioning your frugal lifestyle? When there are a multitude of commercials encouraging spending, is it a wonder that people do? One of the reasons that I follow financial blogs and your pod cast is to see viewpoints that value living frugally and investing wisely.

    As for the importance of math and science- I think it is unreasonable to encourage children to follow technical careers so long as their skills are NOT highly valued and compensated. Consider the following: From a salary standpoint which is better degree a technical PhD or an MBA? Which takes longer and requires more math skills? Who reaps the financial rewards- the scientist that makes the discovery that enables a product or the CEO of the company that makes and sells the product? Given your answers, would you recommend your child become a scientist or a businessman?

    Social Security- I agree that there has been a void in political leadership from both parties. However, I think a major reason is that AARP is a very powerful lobby that makes changing the SS system political suicide. I fear that true leadership will elude us as long as political campaigns requires massive fund raising, allowing special interests to effectively purchase our representatives. I don’t see the problems of our political system changing without campaign reform.
    The change in life expectancy since 1935 has drastically changed the needs and effective purpose of social security. In 1935 most people would not have lived many years beyond the retirement age of 65. If the system had tracked changes in life expectancy the current age to get full SS benefits should be around 74! I suspect that would go a long way toward fixing the solvency problems we currently have…
    A final comment- our world is changing radically at a pace I think we try to ignore. Take a look at http://www.slideshare.net/jbrenman/shift-happens-33834 – for an interesting perspective. In particular consider slides 26-28 when thinking of our country’s future.

    -Rick Francis

  6. Brian,

    Great podcast and I agree with you whole heartedly.

    Over consumption, and living beyond our means is what really caused the current economic crash and it’s not over. I retired last year at age 61 by not keeping up with the Joneses. I saved about 20% of my income for many years to allow me to retire early. I knew some kind of market crash was possible but didn’t call the housing component exactly. However we did sell our home of 20 years in the summer of 2007 as the market began to slip. Still we got a great price, paid off our mortgage, and are now debt free. America has been living on borrowed money for too long, and living a life style out of sync with our income and out of balance with the rest of the world.

    The reason so many jobs have been lost to other countries is it is simply less expensive. Our American salaries are not supported by our product output. If we produce identical products with higher salaries something has to give and it is usually quality. This economic “reset” is good for the country. Salaries are being brought down while salaries in the rest of the world, namely India and China, are creeping up. The gap is still large though and will take years to come into parity. Our life style will have to be reined in and our expectations have to be reset for us to balance with the rest of the world. We no longer hold claim to having superior products or manufacturing.

    The biggest example I can think of is GM which seemed to ignore the trends and drove the company into the ground. The UAW pushed for more benefits which squeezed profits for GM resulting in lower quality vehicles. Workers expected high salaries (well beyond their foreign counterparts), good health care and retirement benefits. We are paying for decades of decadent living and it’s time to pay the piper.

    Keep up the good work,
    John

  7. One of the things that I think has contributed to this problem is the shift by everyone (individuals, families, businesses, industry and government) from long-term goals and rewards to a fixation on short-term goals and rewards.

    Individuals are only interested in the “now’. Things that were hot, new and interesting today are old news next week. Families live paycheck to paycheck and only plan for the next week. Anything out of the ordinary that happens is a major problem. They aren’t willing to make any sacrifices to obtain bigger rewards later. Business is only interested in meeting their quotas for this quarter. CEOs don’t care about long-term progress, they’ll take their golden parachute and be gone before that happens. Industry has outsourced jobs and manufacturing to make a quick buck this year. Now they are paying the price when no one wants to buy their cheaply made products. Government borrows from tomorrow to pay for today. Politicians promise everything because they know they won’t be around when the bills come due.

    Everyone and every part of the system needs to shift their priorities to longer term goals. We need to build our manufacturing base and infrastructure based on where we want to be in 10 years or 20 years, not next year. We need to keep driving our current car and save for one in 5 years, not pick up a new lease because the current ones have a cooler GPS. We need to invest in our education system to train students for the jobs they will have in 10 years, not just teach them enough to pass the tests that give the school the state funding. We need the government to cut spending and pay down the deficit, rather than promise more funds today.

    There is plenty of blame to go around for this situation. The government has done plenty of reckless spending without concern for the future payments that will be necessary. Wall Street has made public companies beholden to meeting their quarterly projections. Consumers have made businesses cut every corner and squeeze every supplier in order to keep prices down. And individuals have succumbed to advertising that encourages more conspicuous consumption without regard for need or the ability to pay for it.

    Longer term goals inherently mean current sacrifice and that’s not “cool” in today’s society, but that is one of the things that made this country as great as it is. In the past everyone would work together towards a common goal, be it on a federal, state, or community level. Today, no one cares about anyone else, and no one is willing to give up anything today for the unknown rewards of tomorrow.

  8. I kind of agree with you that this generation of US has to pay for what they did. American now live above their mean for quite a while and the reality hit them hard. The economy falls to the very worst.

    Or we can see from the spiritual site of it. American under Bush has done unjustified war in Iraq. Hundred of thousands of innocent civilians dead. God does not forget, and now US got the ‘reward’ for what they did it Iraq.

    Or we also can see the common pattern or cycle of economy. It is very acceptable to most economists that in every ten years the economy will go south. That is what happening in US now, its just the cycle.

    Hopefully the economy will recover soon and American will become better people!

    printable fake money

  9. This comment from Rick Francis interested me, and I’d like to respond to it.

    As for the importance of math and science- I think it is unreasonable to encourage children to follow technical careers so long as their skills are NOT highly valued and compensated. Consider the following: From a salary standpoint which is better degree a technical PhD or an MBA? Which takes longer and requires more math skills? Who reaps the financial rewards- the scientist that makes the discovery that enables a product or the CEO of the company that makes and sells the product? Given your answers, would you recommend your child become a scientist or a businessman?

    The only businesses where the CEO/MBA makes the lion’s share of money is in large corporations. Smaller businesses will place a higher priority, and more money, on the innovation and invention people instead of the businesspeople who can squeeze another dollar of cost savings out of the corporate structure. Clayton Christensen’s body of work, including “The Innovator’s Dilemma”, shows what happens when the businesspeople are the ones making the decisions based on efficiency.

    The recent negative backlash toward business may be a catalyst toward making science and engineering cool again. If my youngest brother (the civil/structural engineering major) has more people who feel like him, we will be in good shape. He wants to participate in rebuilding this country’s infrastructure instead of trying to wring more productivity out of some corporate bureaucracy. Only when more engineers think like him will we start to see the research dollars and higher salaries going to the people who actually make things.

  10. Brian, I believe this is one of your most passionate podcasts to date. I really like the way you wove generations into the story – my grandparents lived through the depression, and I can still hear my grandmother forcing me to eat every last bite of dinner I took for my plate, and I remember asking my grandfather why he didn’t drink his glass of milk until he was finished eating – he always replied “to wash it down” … don’t get me wrong, my grandparents were never poor – my grandfather worked for “Public Service” all his life, working up the ranks from lineman (union side) to manager (non-union) and made a good living (I’m still running the pre-war Lionel trains he bought for my father at Christmas for my young boys) but they LIVED through the depression – heck they sat on “potato hill” in NJ and LIVED on potatoes during the great depression. They knew from life & death situations what it was to conserve and save. My parents took a hybrid approach as my father had been raised to be frugal, however my mother was quite different (opposites attract as they say!) so growing up I had a mix of unrestrained prosperity from my mother’s Italian side and (inherited?) financial restraint from my father. I have often wondered of the “watering-down” effect of the generations, and agree with many of your common-sense observations. There are many other factors contributing (as so many of the other comments point out) however I believe this argument is no less important to our understanding of our individual social responsibilities in our towns, cities, states, countries and the world at large.

  11. Thank you Brian for another insightful podcast. I share your revelation and am also a Gen Xer. I have observed many in the Boomer generation who have enjoyed wealth in the past but are now in a very different financial situation and simply unable to make the lifestyle/personal adjustments necessary to be financially fit. And It’s understandable. Even speaking for myself, going from a nice Audi to my current $1000 car in order to remain financially solvent has been humbling.

    Unfortunately, I think many folks lack the determination, dedication, humility, self-awareness, resourcefulness and perspective it takes to adopt many of the ideals and financial practices of the Depression Era folks.