The fact is that the majority of wealth created today is first generational wealth. Let that sink in. What that means is that if you’re rich, there’s a good chance your parents weren’t. Of course, the wealthy do try to pass their wealth on to their children — as we’ll see in a moment — but much new wealth besides that is created as well.

The whole idea that the rich teach their kids stuff about money that the poor and middle class don’t may be true, but it isn’t the reason you’re poor.

Matthew Klan

It’s important to note that while income mobility is greater than most people believe, it’s also not as great as it could be, especially since the most recent economic ‘recovery’. (Later I’ll introduce you to the idea of economic seasons, and why it’s so important to be in touch with them if you want to create wealth.) However, what we’ve been seeing around the world is a rejection of natural seasons — cycles are being flattened out, seasons are being tampered with.

The most natural thing after a big correction like the GFC is that the gap between the rich and the poor should decrease — after all, the rich have more to lose (the poor are already at the bottom).

What we saw instead was a massive stimulus that only served to re-inflate the assets of the rich, while the wages for the rest of the economy remained flat, due in part to other policies that were designed to kick-start the economy by indirectly keeping wages low. Trying to ‘fix’ the natural seasons of money has led to greater inequality.

Don’t get me wrong, there’s a good chance poor people do model poor financial skills for their kids and having wealthy parents does increase the chance that you would be exposed to better financial habits. But if the only way, or even the major way, that people became rich was by learning techniques or secrets from a rich parent, then the majority of wealth wouldn’t be first generation at all.

This is good news if you want to become rich but don’t have a rich parent. It’s bad news, of course, if you only want an excuse for not becoming rich! Though chances are, if you had a poor parent it probably was a handicap. But luckily one you can overcome without changing parents!

In fact, copying the behaviours, habits, even beliefs of the successful is not enough. The behaviours that make you rich will change with each generation; it’s only the fundamental principles that won’t. For example, saving money as a primary strategy can be good in a deflationary period, but bad in an inflationary one.

If you are going to model someone, copy their goal, their destination. Two people can arrive at the same destination taking very different paths. If you only copy someone’s steps you need to make sure you copy them exactly if you want to arrive at the same place. And this is providing the terrain hasn’t changed in the meantime. But don’t just copy their goal; copy their reason, their motivation for choosing that goal. In other words copy what they value, that is driving them towards their goal.

We are all following paths that have led previous generations to wealth, security and so on — but will following those paths get us the same results today?

By focusing on the goal and the thing you subconsciously desire, you’ve got a reference point. Will doing the same thing as the previous generation still get me where I want to be? Or can I come up with my own unique way of getting there? Perhaps then, the most important influence from your parents is what they taught you to subconsciously desire.

Three generations of wealth

In 1901 Thomas Mann wrote the novel Buddenbrooks, in which he narrated the decline of German merchant familial wealth over several generations, giving rise to the phrase ‘the Buddenbrooks effect’ to describe how family wealth declines over time. Often the first generation, seeking money, becomes rich; the second generation, born into money, seeks social and civil position; while the third generation, having been born into comfort and prestige, looks to a life of music and the arts, until eventually the family wealth declines.

Men fight for liberty and win it with hard knocks. Their children, brought up easy, let it slip away again, poor fools. And their grandchildren are once more slaves.

DH Lawrence

You find this story echoed throughout history and around the world. In the UK, somewhere around Lancashire circa 1700, the saying ‘from clogs to clogs in three generations’ arose, based on a similar observation regarding the three generations of wealth and the types of shoes that peasants wore. Later in the 20th century this evolved into ‘from shirtsleeves to shirtsleeves in three generations’.

More recently, author Amy Chau noted a similar phenomenon in Chinese culture, explaining: ‘There’s an old Chinese saying that prosperity can never last more than three generations.’

In the United States, the bestselling book The Richest Man in Babylon related the fable of ‘The Luckiest Man in Babylon’: the tale of Arad Gula and his grandson Hadan Gula. In this story the socialite grandson of a wealthy merchant laments how neither he nor his father could divine his grandfather’s secret for attracting the gold coins, and subsequently they were facing financial ruin. A wise old friend of his grandfather’s tries to teach young Hadan how his grandfather had valued very different things than his socialite grandson.

What all these different stories tell us is that there seems to be a cyclical nature to building wealth. Wealth doesn’t increase in a straight line. Having a rich parent doesn’t guarantee you’ll be rich and having a poor parent doesn’t mean you’re stuck being poor either. In fact, it seems that instead of blindly copying our family’s values, beliefs and behaviours, we instead end up valuing the things we do in reaction to our family.

The arc

Families aren’t the only institutions that seem to follow a generational arc: starting with wealth building, followed by consolidation and sometimes decline. Civilisations also seem to follow cycles.

The reason we talk of ‘golden ages’ is because there are periods that are more prosperous than the periods before, or after them. If there was no arc, history would be just one long golden age, but it isn’t. At what stage of the arc is our civilisation today?

It can be very trendy to prophesise civilisational decline — and it’s not always unfounded! But fortunately, regardless of whether our civilisation is advancing or declining, there are many arcs within a bigger crest. Think of tides ebbing and flowing when thinking of civilisations and golden ages. And think of waves cresting and breaking when thinking of the fortunes of families rising and falling. At any one point in time what moves the ocean in or out the furthest are the waves. Over a longer time frame, it’s the tides. That’s why it doesn’t matter to your individual situation so much where we are in the civilisational cycle — but where are you in your family’s arc? Is your wave rising, cresting or falling?

Of course, understanding the bigger cycles can be vital to help you to position yourself to create wealth, especially over the longer term. But thinking you can change those cycles is like King Canute sitting in front of the rising tide and ordering the ocean to advance no further. (King Canute was king of England from 1016 to 1035. He didn’t actually think he could command the ocean to retreat: that’s a modern misconception. He was proving a point to his obsequious courtiers who were constantly flattering him, that despite what they said he wasn’t in fact omnipotent.) I’ll talk more about cycles in part II.

So why do we see that most of the wealth that’s created is first-generation wealth? Why does wealth seem to only last a couple of generations in some families? Our families are a big source of where we get ideas about money, but perhaps not in the way you would think. We don’t learn our money beliefs and habits based on observing the beliefs and habits of our parents alone; we also learn about money by how our families influence us to earn or receive it (I focus on how you earn or receive money and the effect that has on you in part II). What does that mean?

Rich parents practising good money habits to create their wealth may inadvertently teach their children bad money habits. Wealthy parents who want children to ‘have their lifestyle’ may actually rob their children of the ability to create that lifestyle for themselves. They may set their kids up in a home to help them get started, for example. The book The Millionaire Next Door addresses this well, as we’ll see later.

Probably the best examples though, come from immigrant families. The parents move to a new country because they value something strongly that they feel they couldn’t get at home. Perhaps they value freedom, or in many cases security. Those immigrants who go on to be successful often do so because they have a strong motivating value — what I call a Dominant Value — that drives them to success.

But as we will see later, while there are many paths that can lead to wealth, not all of them lead to financial freedom. The hardworking immigrant parents who scrimp and save their whole lives often want their kids to grow up without the same fears that drive them. And who can blame them?

… while there are many paths that can lead to wealth, not all of them lead to financial freedom.

Wealth that comes at the cost of fear will not feel very freeing at all. And it would be a cruel parent who wants their kids to feel fearful just so they can be prosperous. This often leads them to encourage their kids to value different things. The kids of successful immigrants may grow up in an environment where there is material wealth, but their parents are often set on encouraging them to value different things than they did when they created that wealth in the first place.

And often they are not bad things to value either; they are encouraged to value education, for example, and of course the status that may come with that. So, the kids of rich immigrants are sent off to university to become professionals. In turn, their children, the third generation, grow up in families where money isn’t a big concern, and neither is family status. They are the kids of well-off professionals, and their parents — having been driven to value status by their immigrant parents — want their kids in turn to value something different again.

And the cycle repeats.

On the other hand, our families may also indirectly influence what we value because of the environment they create for us growing up. In fact, some of the children of poor families may actually go on to become wealthy precisely because all the responsibility fell on them growing up. As journalist Katharine Whitehorn noted, ‘The easiest way for your children to learn about money is for you not to have any.’

But if they are driven by fear to create their wealth — fear of being poor or of living in chaos — what chance do they have to ever feel free themselves? And like the successful immigrants referred to above, how do they pass on the secrets of their success to their children when their motivation was based on a fear they would never want their children to have?