A Crisis of Financial Illiteracy, or Tex- a Cautionary Tale
I read today that in most cases globally, 70% of wealthy families’ income is gone by 3rd generation and 90% is gone by the 4th generation. The idea that there is a cycle- of struggle, to wealth, and back to struggle — or “shirtsleeves to shirtsleeves” — apparently holds true the world over. But why? I have a few theories about this:
If you are lucky, smart and hard working in some magical proportion- you end up achieving material wealth. Then you want to give your kids what you could not have — and the very act of indulging them usually squashes the drive that would make them able to retain the wealth. A first hand, real life example of Tex the intern:
I once had an intern, we will call him Tex, from a very wealthy family. In the worst example of how the system is sometimes rigged- Tex received a very coveted and scarce internship at a large bank solely because his father was one of the largest depositors, and demanded it. That was undoubtedly one instance in a string of events where Tex received special treatment — to which he was completely oblivious. Tex had neither the grades nor the drive to get through the interview process generally reserved for over achievers from the Ivy League- and yet there he was in the intern class. Tex- had no interest in working at any bank- or as far as I could tell in working in any capacity whatsoever. Tex came in dutifully every day, put his cowboy boots on the desk, and frequently dozed off- sleeping off the hangover from the previous nights’ extravaganza- much like the Adam Sandler character from the movie Billy Madison.
Tex refused to do any work and with only the greatest disdain would speak to the people around him- and in those instances, would typically regale them with stories of where he would be taking the private jet for the weekend. I was once able to cajole Tex into looking up something on the internet (I was looking for the answer to the question “what do lazy young people like to do?”- and surf the internet was what I came up with)- but alas, this proved too much for him and he was unable to transmit the information to me that I was looking for -beyond a few words scrawled on a piece of unlined paper- much like a second grader would do. It all came to a predictable end when my employer offered Tex a full-time position (!!), telling him and his father what an outstanding job he had done as an intern. (The real review of his work that I had written crumpled in a ball at the bottom of my boss’s trash can accompanied by a warning to me to never (EVER!) say anything negative about Tex). Fortunately, and predictably, Tex never responded to the job offer- consistent with his lack of acknowledgement for the people far, far beneath him- and we never saw him again. Tex became the poster boy for me as to the reason why inter-generational wealth deteriorates so rapidly.
The sad reality is that most people have no idea how to manage money. My maternal grandfather- who in his middle age did achieve financial success- would often say that it is easy to make money and hard to hold onto it. For many people, it really isn’t that easy to make money- but for most people no matter how much they make it is hard to hold onto it. There seems to be one of two reasons- either people don’t know how to manage money, or their desire for material gratification is insatiable irrespective of how much money they have. Most people have a limited understanding of the economy, markets, and even the more micro elements — such as how best to plan to buy a house, how much money they will need in retirement, and essentially what difference it makes to apply yourself to prudent financial management. These skills are not taught in school and if you don’t have the knowledge you can’t pass it on to your kids. We are all familiar with the statistics- such as 6 out of 10 Americans don’t have enough savings to cover a $500 unplanned expense. Sadly, those statistics don’t change very much when looking at pre-retirement or retirement age people- a disturbing fact when looking at the other challenges of being an older adult. The good news is that financial management tools are becoming increasingly available to the general populace- because of technological advances, financial planning and advice that was once only available to the very wealthy is becoming available to everyone.
In the instance of living paycheck to paycheck irrespective of how large the paycheck, is an entirely different problem. Wealthy people, like Tex, are not necessarily smarter about how to hold onto their money- as the unfortunate parade of athletes, celebrities and lottery winners who find themselves destitute shows. While it is easy to put this out there as a morality tale, my personal view is that even in this case, there is a significant element of financial illiteracy. While the short-term gratification of spending in excess may be addictive, it seems equally likely that if people understood that they would run through all their money and be poor within their own lifetimes, they would manage the funds differently. The reality is that you can’t know what you don’t know.
In an Aug 24, 2010 article entitled “Financial Illiteracy is Killing Us” in Forbes magazine, the following statistics drive the point home:
1/3 of adults have no savings
33% of parents want to send their kids to college but have no money saved for it
84% of students have credit cards, and 50% have 4 or more credit cards
In that same article, it is demonstrated that teenagers who learn about goal setting, managing savings and checking accounts, budgeting and tracking spending were significantly more likely to save regularly, and to achieve their short term financial goals.
The key — whether in retaining inter-generational wealth, or in just achieving financial goals for your life- seems to be in financial education. As a parent, finding a way of incorporating financial education into your child’s life is one of the greatest gifts you can give them. Imagine an alternate universe where Tex’s father gave him no special help in getting internships, but required that he work to fund his own recreational activities. What if Tex was not given the private jet to carouse on the weekends but rather had to demonstrate prudence and proficiency in money management to one day access the family fortune- and was given training to achieve those goals? What if each of us were knowledgeable and skilled in how best to manage our resources- irrespective of how large or small, and we could pass that knowledge on to our children? Imagine if in doing this is we could eliminate the major financial pitfalls that have become all too common in our world today. Given the abundance of information now available in ways never before experienced in the history of humanity, as well as the advances in technology, this may actually be within reach.
