Wealth Management – How To Stay Wealthy

Money is like fitness – hard to obtain and maintain but easy to lose. It is important when developing and implementing your wealth creation plan that it doesn’t become the destination. The goal should not be to make X amount of money and then live it up; to get wealthy and stay wealthy you need to learn how to balance your expenditure and investments. 

Inheritance To Indebtedness – How To Manage Your Wealth

Congratulations, you have just become the beneficiary of $3 million. How do you feel? It’s fair to say the majority would be elated. But is the receipt of a life-changing amount of money a blessing or a curse?

Roger Griffiths (pictured) won nearly $3 million in the UK National Lottery eight years ago.

Today he is virtually penniless. According to the news article:

Griffiths has just less than $10 in his pocket. The mansion, Porsche and private school places for the kids are already a fading memory. Griffiths lost it all through quirky spending (he spent $37,000 reforming his student band and making a record) and a series of poor investments he thought could double his fortune. He now relies on his family to help him pay day-to-day expenses.

Griffiths isn’t the first person and most certainly won’t be the last to waste a fortune.

The mercurial soccer player George Best easily quantified how he lost his fortune: ‘I spent a lot of money on booze, birds, and fast cars. The rest I just squandered.’

As a person who likes to exercise, I have always said that money is like fitness; hard to obtain and maintain, but so very easy to lose.

Suddenly gaining a serious amount of money without the proper skill set to manage that money is similar to changing your mode of transport from a pushbike to a high powered motorcycle. Most people are ill-equipped to handle the change and often end up as a financial fatality.

Are You Prepared To Manage Your Wealth?
When your world consists of the usual money problems – paying bills from minimal savings, meeting mortgage payments, juggling to prioritise expenses etc., it’s easy to understand why people think the ‘lotto win’ will solve their problems.

And they’re right – it will solve the problems they have been conditioned (by their life experiences) to deal with.

However the money world has its own set of problems. It’s just that most people never get to experience these problems, so they have no appreciation of how to manage the issues that suddenly confront them.

The following chart on the average retirement balance of households with superannuation (yellow bar) compared to households without (green bar) shows why the majority are poorly prepared to handle significant amounts of money:

The average 55 to 64 year old (with super) has $100,000. While $100,000 may be a reasonable amount of money, it’s unlikely the acquisition of this amount over a lifetime would have provided the owner with more than a basic understanding of finances.

As obvious as it sounds, there are two components to Family Wealth – Family and Wealth.

Receiving a large sum of money provides the Wealth – this is the easy part. The difficult part is managing the expectations – yours and your family’s.

Those who say, ‘money is the root of all evil’ don’t understand money. Money is money – it doesn’t have any emotions or agendas. Money often reveals the true character of people and this is when things can become nasty.

Families are a complex web of characters – each harbouring their own belief systems, prejudices, opinions and emotional baggage.

Managing these family issues successfully is as equally, if not more, important in the quest to retainfamily wealth than the appropriate asset allocation and tax and legal structures.

Communication and education are crucial to the successful management of family wealth.

Even having money is no guarantee for financial success.

The Packer, Murdoch and Lowy families are examples of how seriously the older generation takes its responsibility to provide their children with financial knowledge.

The older generation taught the younger generation about the business and financial world. This didn’t mean they were immune to making mistakes; rather they are better equipped than most to deal with the pressures and responsibilities that come with wealth.

On the other hand a child of another media baron didn’t fare so well. Warwick Fairfax (part of the Fairfax dynasty) at the ripe young age of 27, tried to privatise his family’s media company in 1987 – this is an extract from Wikipedia:

Educated at Oxford and Harvard, he successfully took over the company but on 10 December 1990 the company collapsed and a receiver was appointed. The controversial method of financing and purchasing holdings of the established company from family members and the consequential problems arising in the media group in later years are still cited today in Australian media history.

Young Warwick had a blue blood pedigree and formal education to match, but lacked the practical know how. He went to play in a media sandpit that at the time was occupied by Packer, Murdoch, Kerry Stokes etc. He was clearly out of his depth and paid a hefty price.

In her book Fairfax: The Rise and Fall, author Colleen Ryan wrote this about young Warwick’s failed venture:

It was a disastrous plan. Warwick would take just three years to blow his inheritance, and banish the family from the empire they had ruled since 1841. In the immediate aftermath of the debacle, Lady Mary (Fairfax) would tell the SMH [Sydney Morning Herald] that her son “had no idea what he was doing”.

Here was someone born into money, with the best education money could buy, and yet he couldn’t succeed. So you can appreciate just how difficult it is for the average person to manage wealth.

According to some studies on intergenerational wealth, approximately 60% of family wealth failures stem from poor communication and lack of trust. Inadequate preparation of heirs accounted for another 25% of failures – young Warwick belongs in this category.

The family wealth is lost to other parties – lawyers, business people adept at parting a fool and their money, ‘fair weather’ friends etc.

Practical education on how markets function, budgeting, risk management, sound business principles, asset protection and legal tax minimisation strategies are essential to building, maintaining and advancing family wealth.

No one can learn this overnight.

The Key Ingredient For Family Wealth
When weighing up the challenges of managing your Family Wealth project, it’s worth remembering Waite Phillips’ saying: ‘Nothing worthwhile was ever accomplished without the will to start, the enthusiasm to continue and, regardless of temporary obstacles, the persistence to complete.

If there is one key ingredient to the success or failure of Family Wealth it’s communication. The importance of having the ability to sit down and talk with your family about the following issues cannot be overstated:

  • the lessons you have learned
  • the mistakes (and these are equally as important as the successes) you have made
  • how you approach the management of your financial situation
  • your estate planning decisions (especially if there are any contentious ones)
  • the people you have learned to trust for guidance

Irrespective of the amount involved, it’s absolutely critical you engage your family members in the discussion. From my personal experience you will be surprised what they absorb – the things my daughters now repeat back to me and my observation of the way they handle their finances tells me all those chats around the dinner table must have had some influence on them.

Communication and learning is a two way street. Sometimes the feedback will surprise you. The veracity of your opinions will be tested and you will be sent in search for answers. This is healthy, as no one is the font of all knowledge.

Financial illiteracy is a major reason behind so many lost fortunes.

To minimise the prospect of you and your family becoming another one of the sad statistics, follow the example of financially successful families – commit to acquiring knowledge and sharing it with those you love.

On a personal note, I wonder if Kerry Packer had mentored Warwick Fairfax, would the outcome have been different. My gut feeling is it would have been.

Quality knowledge leads to quality outcomes.

This article originally appeared as a guest post on The Pursuit Of Happiness. To read more articles in the series, click here

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