Think about items that could be passed down to the next generation: jewelry, artwork, a treasured photograph, or a favorite book.
What about the luxury of not being frugal? The luxury to buy whatever one wants? Are affluent parents passing down that “luxury” unknowingly?
For those not fortunate enough to inherit large lump sums or to be the beneficiary of a trust fund, the only sure-fire way to amass wealth over time is by spending less than you earn. It’s a function of discipline and math. Indeed, the wealth factor of Frugality is a set of behaviors that predicts net worth independent of one’s age, income, and percentage of wealth that has been received through gifts or inheritance. For those building wealth on their own, Frugality is a critical factor. As noted in The Millionaire Next Door:
Being frugal is the cornerstone of wealth-building.
Starting out with a high income, though, could lead one down a different path. The head of a wealth management firm who works primarily with high-income, high-net-worth individuals recently shared with me that his clients’ wealth experiences were different than those featured in The Millionaire Next Door. Most of his clients are wealthy because their income is, in essence, so high that while they may be disciplined, they did not become wealthy by what is traditionally thought of as being frugal. Indeed, at some point, with perhaps enough wealth amassed and a high enough income, one might have the luxury of not having to be extremely frugal (although some still are, like IKEA’s founder, Ingvar Kamprad).
Despite high incomes and high net worth, some parents decide to employ restraint in spending. Conversely, others may model conspicuous consumption. What effect does indiscriminate spending have on the children of self-made, high-net-worth persons?
Let’s imagine that children of high-income, self-made parents experience this type of childhood: riding in a luxury car on their way to a private school; having the latest in technology and fashion before their peers; taking trips to exotic, foreign lands; eating dinner in restaurants with names they can barely pronounce. Will these children be able to give up such luxuries once they are living on their own? Will they understand that mom & dad have a level of wealth that only a few will amass, and that this wealth was driven by high incomes? These may be concepts that 10-year-olds cannot grasp. Indeed, economic outpatient care may be on the horizon.