Playing like a Bigshot

Big shot

Have you ever made a bad decision and later wondered why you made it? Have you ever done something that, even though you know it is wrong, you just couldn’t stop yourself?

How we react to daily situations is a combination of our hard wiring (genetics and how we were raised) and the intellect that we use daily to make decisions. Deep down inside of each off us, we feel a certain way about ourselves (ego) and we act according to this self perception and about how we feel perceived by those around us.

When it comes to money, this is a powerful combination. We may know in our brain that we should act in a certain way, but the desire to feel loved, recognized and appreciated often undermines actions that we (know that we) should take.

Last summer I was overseas working with two colleagues. We were in a hotel (company paid) that had a free laundry service. The workers in the laundry were from Pakistan or Bangladesh. By Western standards, they were quite poor. I believe that their monthly salary was about $300 (US). This might not seem like a lot off money but as I talked to some of the them, I learned that it is quite a fortune. The average worker in their country earns about $50 per month with nothing left over for savings or luxuries. Working at this hotel, the worker could send home $50 to pay the family’s bills, take $50 for “spending money” and still save $200 per month. After a year long contract, the worker could return home with $2,500 and start a business. This one year long sacrifice could change that family’s situation forever.

Now add to the mix, about 100 American expat workers. Along comes the first “big shot” who “tips” the laundry guy $3 to wash the laundry that the worker is already paid a salary to wash. The American worker feels justified paying $3 for a tip because, after all, the laundry was “free” (paid by his employer). And then, the next guy thinks, “Oh yeah, he tipped, so I should tip too.” And a year later, when I arrived, EVERY guy was tipping $3 per week to get his “free” laundry done. Now, do the math. This $300 per month Bangladesh worker is now taking in his salary PLUS $3 per guy in tips per laundry load. Multiply this x 100 guys for four weeks per month. The “American do-gooders” were giving this guy, outside of his “normal” pay, an extra $1200 a month. This is a 400% tip on top of his regular salary that is already 600% of his national average!

Later, I refused to tip at all and the Bangladesh worker gave me a dirty look. When we picked up our clothes the next day, everyone else had folded clothes and mine were a half-wet ball in the laundry bag. His job was to wash and and fold. But because I didn’t tip, he REFUSED to do even the basic service that was required of him. We had spoiled this worker so that now he expects a tip. No, he demands a tip. My one colleague Matty tipped him $20 one day. I was livid. I told Matty that he was wasting his money and was “screwing the rest of us” because soon this worker will come to expect $20 each time he does our laundry. Matty’s reply was, “Well, don’t be so tight, you can afford it.”

Think about the logic of that. I can afford it.

That’s what poor people say.

I’m a millionaire and I doubt that Matty will ever be. He will constantly chase credit card bills, struggle to pay his mortgage and will complain that he “can’t get ahead.”

Think about the logic of this:

This Bangladesh worker is already earning 600% of his “normal” wage at home. This is the equivalent of an American worker taking a job overseas and getting $270,000 per year (six times national average of $45,000). Now, imagine if you took a job overseas making $270,000 working in Saudi Arabia. And then, as Saudis came in to get your services, they handed stacks of $100 bills. By the end of each month, your tips amount to a million dollars in cash. Does that seem reasonable to you? Well, that’s what we did with this man. We were giving him, when compared to the wages of his country, about a million dollars per month when compared to US wages and living standards.

Later, we went for a $5 haircut and matty paid $20 ($15 tip).

I debated with Matty and some other colleagues. I explained that we were giving this guy a fortune, and for what? Matty explained that he was “helping” the guy. I said that his regular salary was a small fortune and that his “help” was just a waste of his money. Matty then said something telling and I immediately understood WHY he tipped. He said, “When I give that guy the $20 and his face lights up, it makes me feel good.”

Ah ha. The reason why Matty was tipping was because it made him feel like a big shot. It made him feel rich compared to this lowly Bangladesh worker. I then realized that Matty didn’t care about helping this guy, he was showing off in front of him. I thought about how so many people love to over tip in America and I realized that it has less to do with manners and showing appreciation; it has more to do with showing off one’s success and wealth.

Now. If your net worth is over a million and you earn over $100,000 in passive income, your house and cars are paid, you have enough $ for your children’s college education and your 401(k) is maxed out, then go ahead. Tip away.

But, if not. You’re taking money out of your retirement, out of your children’s education, out of your gfamily legacy AND YOU ARE GIVING IT AWAY TO A STRANGER.

Think about it. To stroke your ego and to make you feel “rich,” you’re giving away your family’s legacy.

Some days, I walk around in a t-shirt and flip flop sandals. I still wear my expensive watch, but I dress comfortably. I might be at the mall and I’ll see some young guy with his Rolex, expensive car and I know that he’s up to his eyeballs in debt. I know INSIDE of myself that I’m the big shot. I don’t need to drop a 600% tip on a stranger to feel like a big-shot.

There is a difference between the two and they both revolve around your confidence level. People who are not confident in themselves need the placebo of success that comes from the 30 second “approval” they get from the waiter when they over tip. And in the end, that $3 here and that $15 there add up. If saved and invested, over a decade or two, they can mean the difference of having enough $ to buy that distressed rental property or to snatch up a choice asset in a fire sale. That one asset can turn into an income stream or a sale with a big dividend that can be invested again and again.

People who tip big always seem to be broke and complaining about money. I’m smart with my money and I don’t feel the need to impress anyone. I’ve impressed myself. That is all that is important.

Why We Lied to Our Kids

From Stansberry Research:

By Mark Ford, founder, The Palm Beach Letter

Five years ago, Bill Bonner, my friend and business partner, asked me to speak to a group of about 50 old, wealthy white people meeting in an exclusive beach resort. He wanted me to discuss “the challenge of intergenerational wealth.”

What the heck is intergenerational wealth?

It’s the wealth you’ve acquired for your children, grandchildren, and maybe even your great-grandchildren.

The challenge is how to preserve it. History tells us that people usually squander any money they inherit. And if they don’t squander it, their children surely will.

This is a serious problem for seriously wealthy people. But I believe it’s a problem for middle-class people, as well.

It’s not just about keeping your kids from throwing away the money you worked so hard to save. It’s about keeping that money from turning them into the kind of adults you don’t want them to be.

The experience of speaking to that bunch of 50 grumpy old folks gave me a number of new and useful ideas about this problem. I’d like to share those ideas with you in this essay.

The Downside of Helping Your Children

Let’s be realistic: It feels good to give, and we want to think of giving as a purely beneficial act. (With a stroke of the pen we can make someone’s life easier.) But giving away money – whether to your children or to strangers – often results in unintended consequences… some of them undesirable.

Giving money to your children – at any age – can make them wasteful. It might make them dependent. It might weaken their ambition and strip away their self-confidence. And the expectation of getting money from you might even make them greedy.

It’s easier to understand this when our children are very young. We recognize that giving a small child everything he wants is likely to spoil him.

My wife, K, and I were concerned about this 30-odd years ago, when our children were small. We lived in Boca Raton, where high-income baby boomers climbed over one another in some fiendish, unspoken competition to out-spend each other on their offspring.

Parents taught their grammar-school children to distinguish Hondas from BMWs. High school kids knew which of their friends’ parents had the highest-paying jobs. Some of them felt proud to come to school wearing Rolex watches and Gucci shoes.

As our family CEO, K waged a war against this by having high expectations of our kids as students and as family members. She was strict with household rules and stingy with luxuries.

If our boys failed to maintain a B+ average, we didn’t allow them to go out. Period. Before they could play on weekends, they had to work around the house. And the work was real: cleaning toilets and cutting the lawn.

We had no live TV. Video games were verboten. We never bought them clothes or toys when they asked for them. They had to wait for their birthdays or Christmas. But most of all, we expected our kids to be respectful to us and to others.

In other words, they were part of the universe, not the center of it.

K’s approach worked. Our children were not spoiled. Although – I must admit – I had doubts at times. Once, a few hours before picking up his date for the junior prom, I found my eldest son polishing the vinyl seat of the vehicle he was driving to the event: his 20-year-old, rusted-out pick-up truck. (He bought it from his grandfather.) He worked away at it in good spirits, seemingly oblivious to the stuffing coming out of a large tear in the middle of the seat. I wondered if we had gone too far.

Now, I have no doubts.

The Inheritance Question

What about leaving your kids money after you die?

I have a friend who doesn’t speak to his siblings because of a dispute over the distribution of his mother’s belongings after she died.

I’ve heard my neighbor refer to her mother-in-law as a “selfish bitch” because, at 80, the woman remarried and began spending some of her money on her new husband. When my father left more of his property to two of his daughters because they were unmarried, it caused a resentment that lasted several years.

“Family fights among children after death occur in a large percentage of families,” Tim O’Sullivan, an estate planning and tax attorney, told U.S. News & World Report. “If the No.1 goal is to create family harmony, then the estate plan ought to be designed in a way that preserves it. It’s so sad to see what happens in these situations.”

The last thing a parent wants is for the money he leaves his children to become a source of discord. And yet, it happens all the time.

This is precisely why K and I always lied to our children.

Whenever the subject arose, we told them – in clear terms – they would “never inherit a nickel” from us. We said we intended to spend all our money before we died. If we couldn’t spend it all, we would give it to a charity. We told them that we expected them to earn their own money – that they weren’t entitled to any of ours.

And we meant it.

Well, we meant the part about expecting them to make their own money. But we lied about the inheritance. Of course we’re going to leave them our money – at least some significant part of it.

We lied because we were afraid that if they expected an inheritance, they might become less ambitious. And it seems to have worked. Our boys have grown into young men who work hard, pay their bills, and never ask us for money.

Another – Maybe Better – Approach

Meanwhile, my friend Bill and his wife, E, took a different approach. They avoided lying when their children were small by simply avoiding the topic of money. Talking about money – they taught their children – was gauche.

But then, as the children grew into adults, they began to talk frequently and openly about their money. In fact, they formed a legal structure designed to preserve the family’s intergenerational wealth.

In preparing the speech Bill asked me to give on “the challenge of intergenerational wealth,” I had a conversation with him about our different approaches. And it changed some of my thinking.

I told him what we had done and said that we were happy with the results. I also told him that now that my children were adults – and their characters were largely formed – I was having trouble not helping them.

And then we talked about the inheritance issue.

He was surprised to hear that our children still believed they would not inherit anything from us.

“How long do you intend to continue with this lie?” he asked.

“‘Til the bitter end,” I answered.

“So they will find out after you are gone that they have all this money,” he said. “Just like that?”

“Right.”

“And they won’t have had any guidance from you on how to manage that money… how to work together to preserve and grow it… how to use it productively?”

That hit me like a ton of bricks.

My kids knew how to work hard. They knew how to enjoy their lives. But I now realized that one day they would inherit many financial assets about which they knew nothing.

So K and I decided to have a family meeting. We made it a formal meeting and asked our family attorney to preside. At that meeting, we showed our three boys – for the very first time – the sum of our assets. And we told them that we intended for them to inherit some portion of that.

I am pleased to report that their first reaction was negative. “We don’t need your money,” they told us. “And we don’t want it.”

I told them that I was happy they felt that way. But like it or not, they were going to inherit a sum of money one day. And we had to start talking about what they would do with it.

Since then, we’ve had several more meetings. And those meetings are influenced by a publication and organization that Bill and his eldest son, Will, started. It’s called – appropriately – The Bonner Family Office (BFO).

One big idea that we borrowed from the BFO concerns the purpose of inherited wealth. Bill doesn’t believe in cutting up wealth among the children so that they can do with it what they like. He sees the wealth as an integral family asset that should function more like a bank.

Rather than inheriting lump sums of money, the children inherit an interest in the family fund. The purpose of that fund is to help individual family members enrich their lives… but how they do that must make sense.

Children can borrow from the fund. But if they do, they must return the borrowed money with interest. They can use the money to start businesses or pursue education, but they can’t use it to buy sports cars or yachts. They also should help the fund grow in value. That way, when they die, it’s larger than it was – large enough to help their own children.

As it happens, I had formed The Ford Family Limited Partnership 20 years prior to this, so we used that structure to accomplish these goals.

We’ve already used the partnership to extend two loans: one to help our eldest son buy a house and another to help our second son start a business. Without access to these funds, neither of them could have done those things.

Their credit may not be good enough for banks, but it is good enough for us. Having the limited partnership structure allows us to provide a financial benefit to them without spoiling them.

Another thing we’ve done is include our children in a charitable project I started in Nicaragua a number of years ago. It’s a community center that provides educational and recreational facilities for local people. Originally, I saw this as a personal project – my own experiment in charitable giving. But now, by inviting the family to get involved, I’ve benefited in two ways: I have their help in developing the center, and I can expect that it will be preserved after my death.

Our youngest son took over as director of the center two years ago. He’s done a great job of it, hiring capable people and vastly improving the scope and quality of services. He receives a stipend for doing this. In addition, he’s learning how to manage a somewhat complicated business with 20 employees and hundreds of “customers.” (He asks me questions and sometimes listens to my answers.)

The Ford Family Limited Partnership owns rental real estate, which seems to be the perfect vehicle for our purposes. And recently, our second son agreed to manage those properties. As a musician and composer, he had very little exposure to real estate investing or business management. But he’s taken to it like a duck to water.

He spends several hours each week learning about the real estate business, learning that – like the music business – it can be both fun and challenging. Like our youngest son, he receives compensation for his efforts. This gives us a way to help him out financially that is merited rather than entitled.

Our oldest son hasn’t gotten involved in any of the family businesses, but perhaps he will one day. If not, there’s always the chance that a cousin or grandchild might want to get involved.

We still have plenty of assets to figure out, but we are comfortable with what we have done so far.

The community center in Nicaragua is fast becoming a project we all feel proud to contribute to. And the real-estate business has already become a cool little private bank that can make loans to family members while it grows its asset base steadily and safely.

In general, I feel like we’re doing a smart thing: involving our children in the management of the assets that they will one day inherit while we are still around to provide advice and guidance.

So what have we learned about this complicated subject?

While your children are young…

Don’t buy them expensive things just because you were poor and never had them. Remember that giving your children less is sometimes giving them more.

Expect them to work – and not just at their education. Give them menial household chores and pay them fair market value for their work. Never overpay them.

Avoid discussions of family wealth. If the subject of inheritance comes up, tell them they aren’t getting anything.

When your children leave home…

Make it clear that their bedroom is no longer their bedroom. Put their personal effects in storage. Tell them they are welcome to come home for brief periods as a guest. Remind them that guests are always well-mannered.

When your children become adults…

After your children have proven to you that they can take care of themselves, you can begin to discuss family wealth, including what they might one day inherit.

Consider putting a business or some income-producing assets into a legal structure that can operate as a family bank, making loans to them when merited.

Consider establishing a family charity (if you believe in charity).

Use the family bank and charity to teach your adult children what you have learned about managing wealth.

Best,

Mark

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