If you move up the socioeconomic ladder enough to start achieving higher levels of wealth, you must adapt. Many struggle with that. Some pretend that nothing has changed. That denial has pitfalls and eventually the reality of having wealth, but choosing to ignore it, has consequences. On the other end of the spectrum are those who fully embrace having no limitations and ditch the constraints of their humble past. The extreme maladaptive responses of The Deniers and The Ditchers may hurt themselves and future generations. Building a family wealth legacy that lasts requires healthy adaption. Both for you, and your family, to steward the financial and holistic wealth that you are building.
An adaptor selects the core values and skills from their financial origins that they want to retain. While also developing and integrating new ones from the culture of their new financial status. They also foster those skills and values in the next generation to transfer along with the financial wealth.
Core Values As You Build Family Wealth
Core Values To Preserve
Take the time to define core values that you want to preserve. If you do not, then it is easy to become reactive and default to your natural tendencies. For those with a denial predisposition, the easiest answer to a dilemma is the same as before you had money. Usually “No. We can’t do or buy that.” For the ditchers, the answer to most questions is a simple “Hell ya! Let’s buy it, or do it!”. If it is a problem or discomfort, then they just throw some money at it.
There are some common core values that many people want to hold on to. Things like valuing relationships, collaboration, exercise, and skill development have been hardwired into humans. Not only for survival but to thrive and live satisfying lives. Other core values like perseverance, self-sufficiency, hard work, and frugality (not cheapness) are common “middle-class” values that have helped people advance up the socioeconomic hierarchy.
New Values To Assimilate
There may also be new values that you want to assimilate from the higher echelons of wealthy people that you find yourself amongst. Just like everyone else, there is a wide range of values amongst rich people and they also change as they build different levels of family wealth. Some will resonate with you. Others may not. Sometimes is just a different way of expanding on some of the more ubiquitous core values.
For example, philanthropy can take on a different meaning when you have the means to do it from a position of wealth. Prosocial behavior (giving and helping) is ingrained in humans. It has helped our species survive, but doing it well also makes us happier. When you have more wealth than needed for your lifetime, then it is easier to direct larger amounts towards causes you value. That larger amount of money to give also bestows the ability to direct money more granularly too. Instead of just the usual public campaigns, you may find and lead new ones. This also requires new skills which I’ll touch on later.
Another shift may be in how you value your time. The value that you previously placed on the income earned for spending your time may shift to valuing the sense of purpose that it gives you. We all get the same amount of time. So, when you have more money than you need, that time becomes relatively more scarce than money.
From Values To Decisions
Making more considered and balanced decisions takes work. However, by laying this groundwork, the answer to dilemmas can become a decision and a clear rationale. For example, the denier cop-out of “No, we can’t afford that” becomes “No, we are not going to buy that because we won’t make good use of it and we can spend our money on something else more important to us.” For the ditchers, “Hell ya to everything” turns into “Yes, buying that will help us to spend more time together outdoors and it is good quality. So, it will last and work well.”
Understanding your core values not only gives you something to weigh decisions against. It also helps you to explain your decisions using those values. That will be vital in teaching the next generation how to problem-solve and make decisions. Your core values become family core values and guide the use of your wealth beyond your lifetime.
Principles & Decision Policies
Ben Felix and I go into detail about how to make good life decisions on The Money Scope Podcast. It can be overwhelming. However, if you decide upon some principles backed by your values, it gives you a usable framework. Even better, you can offload some of the cognitive load by using decision policies. Principles and policies make it easier in day-to-day life. That helps your values to compete against your natural denier or ditcher default responses to growing family wealth. While it is important to consider big decisions on a case-by-case basis, principles, and policies create some more space for that by automating smaller ones.
Principles manifest as simple mantras that we can use when confronted with a decision. For example, “choose relationships over money”. Another one might be “buy experiences instead of things.” Simple generalizable mantras that we have thought about in advance are useful.
We can also repackage those principles and to use as more specific premeditated decision policies or rules. Rules or policies exist to be followed in the moment. A potential advantage of calling them “rules” is that they are less likely to be questioned by you or others. People understand rules as an external force. Most people don’t question why you can’t speed. It is a rule. Well, you can try justifying it, but it may not work out for you.
Compared to a principle, a rule is really specific. It is not “don’t go too fast”, but rather “don’t go over 90km/h”. An example of a decision rule that we made now that we are a bit older and richer is “If it involves lifting over 300 pounds or working more than 10 feet off the ground, hire help.” The underlying value is our health and mobility.
Reflect & Re-evaluate As Family Wealth Builds
Rules can be helpful with the day-to-day. However, larger decisions require more careful thought. Also, very few people get things perfect the first time. It may make sense for policies to change as the financial situation changes. As you build more family wealth, the relative cost changes. The underlying values may also shift as integration between the old economic culture and the new one occurs.
So, be open to re-evaluating and changing the rules periodically. Just try to do that deliberately based on reflection on your values rather than in the heat of the moment. That openness to try new ways of doing things, reflect, and adjust is a key attribute for adapting to changes in wealth.
Important New Skills
The basic knowledge and skills that help lead to financial success are also important for stewarding family wealth. Financial literacy and communication are at the core of successful family finances at all levels of wealth. However, as you build family wealth to higher levels, you must develop some of those skills further and in different ways.
Budgeting is Different
Budgeting and planning cash flow is different when you are no longer skimming the surface. Instead of ruthlessly tracking everything and looking for incremental gains on anything, the big blocks dominate more. A few extra dollars here or there won’t move the needle into the red zone. However, big changes in income or expenses could. Much of the family wealth will also be tied up in investments. Anticipating and planning for enough cash flow buffer so that you can manage fluctuating expenses while preserving and growing the invested wealth is key.
Another aspect that changes with budgeting is setting budgets. With the dollar amount being less of a constraint, using values, principles, and decision rules become more important guardrails. Those self-imposed constraints help to keep money real and align the spending with your core priorities. Without straying into the unbridled spending of The Ditchers. Use a stealth frugality approach to spend reasonably on most things and splurge on what is important to you.
Being aware of the cost of things and the work involved in purchasing them also helps with gratitude and enjoyment. Being grateful is a key skill to develop, and doesn’t always come naturally when the work and reward become less tangibly connected.
Effective & Efficient Philanthropy
I mentioned earlier how giving or prosocial behavior is usually a core value and is deeply ingrained in humans. It is also a skill. As you build larger amounts of financial wealth, you are more likely to be approached by various charities to donate. Beyond the local kids knocking at your door or the usual canvassers. Again, knowing your values helps you to prioritize. However, you must also develop skills at discerning which charities are more likely to translate your money into concrete impacts. That may also require your direct involvement. Like sitting on boards and the skills required to do that effectively.
When stewarding family wealth, you probably also want to maximize the amount that is kept in the family or transferred to your chosen causes. Rather than losing excessive amounts to the government for them to direct. That means learning how to donate tax efficiently.
Communicating About Money
Like the other core skills, communicating about money is vital at all levels of wealth. However, as you build higher levels of family wealth, the participants change. So, does some of the conversation.
Couples who co-mingle and openly pool their financial resources tend to be happier and more successful. Openness and collaboration are key. The format could be actual budget meetings early on in the relationship but may evolve into informal check-ins between the partners with only occasional sit-downs. If those couples have kids, modeling this collaboration and how money is used as a tool to support the family is important for their development. A 2018 study showed that family communication strategies impact financial literacy in young adults.
When the family’s wealth is likely to span into the next generation after you are gone, the way that you make financial decisions and prioritize as a family takes on an even greater importance. Some casual conversation about day-to-day finances is common at all levels of wealth. However, a family wealth enterprise may require more formal family meetings as the generations age. They may also require some facilitation by outside experts depending on the content and family dynamics.
External players commonly enter the conversation and implementation of family wealth management. Members of your financial team. Accountants, financial planners, estate planners, and lawyers. Possibly even a family trust and those involved in its administration. Many people think about the numbers (taxes, investment returns, etc.) when meeting with those other consultants. However, those aspects are usually readily “solved”. What is not solved and changes how things are done are your values, preferences, and objectives. Only you can articulate those, and that requires the effort to develop and the skill to communicate them.
Transfer Family Wealth, Values, & Skills
The focus of this post has been on ways that you need to adapt as you build family wealth. However, entwined with that every step of the way is the adaptation of your family. You will do this together at different speeds and in different ways. It can be easier for those in the next generation who don’t carry as much financial baggage from the family’s old life. They will spend more of their lives in the new socioeconomic tier, but watching how well you adapt will have a major impact through modeling.
Parenting is how we transfer not only the financial wealth of the family, but also its values and skills. Dr. Jim Gubman, a psychologist who specializes in and works with high net-worth families describes adaptations in parenting as the most important factor in how a wealthy family does over time. He discussed that with some great stories as examples on The Rational Reminder. Specific strategies could be a whole other series of posts, and their applicability to each family varies. However, the foundation is how you adapt to the growing family wealth and model that.
Share where you came from financially with your kids. That is part of exploring and integrating your values, and passing them on. Translate those values into decisions, big and small. Instead of easy yes or no answers driven by financial limitations or old habits, attach them to the rationale. Model a healthy and collaborative relationship with money in your family through day-to-day discussions and potentially family meetings. Help them to progressively develop the skills to do this on their own.
Hopefully, this post has given you a framework and some ideas to help you consider and improve your own adaptation to family wealth. We will all have our own stories about our journey and migration into the culture of wealth. I will share some of my own in an upcoming series of posts.
