This blog will focus on three things:
- Developing a family structure (both formal and informal) that will help us live our lives according to our values while building the bonds among generations.
- Find ways to turn high income into real and lasting wealth that can help jumpstart the lives of current and future generations while building self-reliance and confidence.
- Use investment principals and structural frameworks from endowments and family offices to achieve a rate of return that can both support current consumption, but more importantly, continue to increase family wealth.
Note: This blog is not for people just starting to learn about personal finance and still mastering the basics. It is also meant for relatively high-income earners, typically people in their 30s or older, making six figures, with a basic understanding of investments, taxes, and the like. If this is not you, I invite you to take a look at any number of quality personal finance blogs.
The Long Read
Family is everything. You don’t need to be a parent to realize that, but something about having kids clarifies it. Great families have staying power through time, and it rarely has to do with money. Great families build a structure that lasts through generations. Great families are able to slow down, halt, and reverse the natural entropy that’s true in all aspects of life (wealth being one, but only one, of the most susceptible to that entropy). Great families help each other stand up, but recognize that they cannot move each member forward; that each member must find a way to do that themselves. Great families are not showboats and while you may never recognize the structure behind them, somehow the community recognize who they are.
My goal is to build a great family.
I do not expect to build the next Vanderbilt or Rockefeller family. My goal is to take some of those principles and find ways to incorporate them into non billionaire/hundred millionaire families. Great families do not consist only of the top 0.1% families, based on wealth alone. While wealth is a crucial component of building a great family, it is not the end all, be all. Wealth allows for the types of initial investments in family members that lead to self-sufficiency and new wealth creation in each generation. Imagine graduating law or medical school with no debt, or getting a $500,000 equity investment in a well-researched and thought out new business. What a difference that makes.
I’m going to focus on three major issues with this blog:
- Family structure – no, not whether you’ve got two parents or one, same sex or not. None of that really matters in the long run. I’m looking to build structures that focuses our combined energies on what really matters to us.
- Lasting Wealth – I will harp on lasting wealth over and over again. As an investment guy, this is a primary focus for me. Lasting wealth turns into old money with time. My goal is to avoid the “shirtsleeves to shirtsleeves in three generations” syndrome. I want my children, my nieces and nephews, my future grandkids and great grandkids to have every advantage starting out. Life’s not fair, and there is no such thing as a level playing field. I want my family to have the wind at their back, not blowing at 60 mph in their faces.
- Investment principles – A common goal for large pools of capital is “real five”. Real five in the institutional world means an after inflation (“real”), 5% return. I’m going to amend that to include after taxes as well, since last time I checked, most personal and family fortune was taxable. I will explore portfolio construction and investment principals that will work to get us to a real five.
Families grow with complexity through time, as generations grow and relationships change. Getting agreement within the family and writing these agreements down is crucially important.
Each of these are discussed in detail in the blog, but some of the following are important in building structure around your family and future generations:
- Family Motto – A family motto is used as a quick and easy phrase that promotes unity and illustrates the family’s guiding principles. This should be fairly short and sweet, and prominently displayed throughout the house. Our family’s motto is “Always striving to make ourselves and those around us better”.
- Family Mission Statement – A family mission statement expands the family motto, but is still only a few sentences long and easily displayed. Think of this as the elevator pitch for who you hope to be as a family. Our family’s mission statement is: “We will live a simple, healthy, and balanced life. We will express gratefulness for our blessings. We will give generously to those in need. We will be life-long learners and curious about the world. We will speak kindly to each other. We will build lasting foundations for tomorrow. We will work to the best of our abilities. We will honor the past, plan for the future, and live joyfully with each other in the present. Above all else, we will always strive to make ourselves and those around us better. “
- Family Coat of Arms – okay, this one is totally unnecessary, but fun nonetheless. Ours is fairly simple right now, just a fancy R to represent the first letter of our last name. We have not done more yet mainly because we’re too cheap to hire a graphic designer and have no talents in that space whatsoever. However, if you have the time and inclination, finding things from previous generations, or even just your parent’s and grandparent’s generation, will help bind the family across time.
- Guiding Principles/Ideal Life – our family has decided against a set of long form, family goals each year in favor of a document that reminds us of what our ideal life would look like. This can include short snippets, or more detailed ideas. For example, our guiding principles include trying to be active in our extended family’s lives (tough to do in today’s world), what we call ABL (always be learning!), and never being afraid to try something new, especially if the worst case scenario is you only being out some time and money.
- Family History – speaking of binding a family across time, finding and writing down a family history helps you, your kids, and anyone else in your family appreciate those that came before you. None of us enters this world as a blank slate. We all have the previous generations to thank (or not) for where we start in life. A family tree is important and fun, but try for a family narrative. Work with parents, grandparents, great grandparents, or whoever else is still around to get some nuggets about previous generations. Even if you’re only able to start with yours or your parent’s narrative, your children will appreciate hearing the stories.
- Family Constitution – finally, the big one. The family constitution gets more and more important as family wealth grows and (for us anyway) as our children grow older. A family constitution can be straight forward or complex. At its core, a family constitution provides a framework for how family management is handled, how wealth is managed, and what benefits and when are available to family members to access.
My greatest fear is having a largely successful career and life, my children turn out to be lazy moochers. Each generation has to be able to stand on its own, regardless of the successes or failures of the previous generation. I want my children to come firing out of the gate with a head start. I received very little financial support from my parents from college on and had to work full-time throughout school to make ends meet. It was tough, and I would have preferred not to do it that way, but I see the benefits it has brought me.
I’m a firm believer in luck being a big driver of the disparity in outcomes, even among my graduating class. I’m also a firm believer in the harder you work, the greater the chance of you seeing some of that luck. I think that was and is my case. My goal is to ensure that my children have a strong and smart work ethic, so that they too may produce their own luck. I’m hoping to accomplish this using a number of tools:
- Expectation of achievement – our expectations in society are too low today. I want my family to know I have high expectations of both myself and them. We may not always live up to them, but it’s better to strive to hit high expectations and miss a little, then to be happy achieving low expectations.
- Wealth is more than money – combined with high expectations, these two concepts should get most of the way to fighting off entropy. I see it every day in my profession. Wealthy people are wealthy because of good upbringings and solid educations, role models that promote the right ways to live, relationships that bring opportunities, and a strong financial foundation that allows for some risk taking when those opportunities arise.
- Intergeneration conversations/family elders – Certain family members seem to step up and set the tone for what happens in the family. This should, and most often is, senior members of the family, although not always. My wife and I see it clearly in our families. Because we have a committed family life with what we consider a pretty successful lifestyle, we feel like we’ve become somewhat of the patriarch and matriarch of our families. We did not plan it that way, but when you start taking the lead on family events and issues, and express certain expectations of the family, it is a natural conclusion.
I also want to extend that beyond just my immediate family. I have family members and in-laws that are struggling in life. One of my goals of this blog is to find out ways to help them without giving them a hand out. Could we just pay for a bunch of stuff? Sure, and it probably wouldn’t hurt our own bottom line too much. But what good would that do? How do you help someone help themselves, without appearing like you’re helping them?
I am, at heart, an investment guy. I work for a multi-billion dollar endowment picking and choosing where and how we invest across asset classes and across the globe. Our goal is a “real five”. That’s a five percent return over the level of inflation. We do that because most endowments or foundations (E&Fs) have a 5% spending goal each year, and don’t want to lose out through time to inflation.
Investing a family pool of capital is not unlike an endowment (except for taxes, which is a HUGE difference and one that we’ll discuss constantly). Endowments are theoretically infinite life investment pools. My goal is to start thinking of family money in the same way. While the goal of an endowment is 5% real return to support spending, achieving that or higher helps continue to increase the size of the investment pool through time. Family money does not (and should not) spend 5% a year, but a target of 5% a year will make any family wealthy through time.
To illustrate, let’s use an example. Assume you’re a mid-30s professional making $300,000 per year. You’re reasonably frugal, so after taxes, insurance, retirement account maxed out, and typical living expenses, you are able to save $60,000 per year. This should be fairly easy, assuming you live outside of Manhattan or San Francisco. I’m able to save almost double that (not counting retirement accounts or health savings accounts – this is after tax investment dollars), and while I live in the Midwest, our city is on par with places like Seattle, Atlanta, and Boston. Not pure flyover country.
Let’s also assume that that $60,000 number increase by 2% a year and you earn 5% per year (both in real, after inflation and tax dollars). The numbers look pretty good, but not great:
Now, let’s turn that into family money. Assume after 25 years, you do not put another dime in, but let it run at 5% per year over two more generations. Suddenly, things look pretty good:
That’s $130mm in today’s dollars. That’s family money.
Is this realistic? Of course not! Things happen, you may need to draw on the funds, you will definitely not get a nice clean 5% per year every year growth. Alternatively, this does not include a nice big pops that may occur through time. What if you invest in a nice real estate deal, and happen to get a 5x or 7x return? Maybe you start a business and get a nice fat buy-out from a larger competitor.
The point is not to try to illustrate what is actually going to happen. The point is to demonstrate what is possible by expanding your time horizon beyond your life and include multiple generations in your thought process. This is the secret of great families.
My goal is to learn as much through this process as I can teach to others. I am by no means the expert, but I’ve got the desire to learn and hope that others have as well.
Keep building my friends.