First published in the Spring edition of Capital Finance Page 135
There are people who have money, and then there are people who are rich, that was the observation of Parisian fashion designer Coco Chanel, herself no stranger to living a life of luxury and who appreciated that material wealth does not necessarily equate to personal fulfilment.
Ms Chanel was fortunate enough to have built a fashion empire that not only meant significant wealth but also a creative outlet and recognition, respect and value beyond money alone.
Back in 1943 psychologist Abraham Maslow identified in his hierarchy of needs the fundamental factors which humans must attain to achieve self-fulfilment. At its most fundamental we need air, water and food to meet our physiological needs. Next comes safety – a secure environment to live in, safe passage as we go out about our daily business. The third factor is love and belonging, to feel part of a family and a social structure, building long-term meaningful relationships. Next is self-esteem. This comes from doing an activity or job you enjoy, spending your time in a way which reinforces a sense of self-worth.
Once these elements are met a person can achieve self-actualisation – i.e. to be everything they can be and fulfil their true potential.
Clearly money is critical in meeting the physiological needs and it goes some way to securing safety. But after this point, financial gain contributes less and less to a person’s overall happiness. Indeed there comes a point where money starts to diminish your overall happiness.
Malcolm Gladwell identified this phenomenon in his book David and Goliath: Underdogs Misfits and the Art of Battling Giants in which he understood the limits of money in achieving happiness. Mr Gladwell illustrated money’s impact on happiness by plotting a graph. Initially wealth and happiness increases in tandem. However, at a certain point – which Mr Gladwell placed around the $70,000-dollar mark – the impact wealth has on happiness begins to wane.
Many studies have borne out this phenomenon, with salaries at around £100,000 in the UK shown to be the happiness tipping point. This concept may seem a little perverse; if £100,000 can make a person happy then surely double, triple, quadruple that would equate to an equivalent increase in personal well-being.
But the truth is once you own a car of a “reasonable” standard, once you have a decent house and you can dine out in Michelin star restaurants and treat yourself to foreign holidays, those needs have been met.
Buying a slightly better car only brings greater happiness if you truly love the new car. If the purchase is a mere status symbol, the car represents a material rather emotional gain.
At the same time, money cannot resolve familial or social problems – throwing money at a spouse will not counteract underlying marital difficulties and may even make them worse.
Money potentially attracts ‘hangers on’ and ‘yes men’ keen to share in the spoils leaving the super wealthy hollow and without reliable affirmation of their genuine worth. So, the further we move up Maslow’s hierarchy of needs the less relevant money becomes in achieving happiness.
Not only is money unable to solve problems it can actually create them. Nowhere is this more obvious than with parenting.
Initially additional wealth makes parenting easier; it is possible to pay for private education, to support children in their goals and aims, give them a rounded and comfortable childhood. Yet, past a certain income parenting starts to get especially complex.
The children of wealthy parents may have a sense of entitlement. They have been born into the lap of luxury and may have little appreciation of what it takes to build up a fortune.
In addition their understanding of the value of money is skewed. They are used to a lifestyle funded by a five-figure allowance. This makes it almost impossible to attain the same level of income through their own volition, when starting their careers.
Moving from university into a salaried job is hard enough today, let alone one that pays enough to match the lifestyle to which they are accustomed.
This saps the wealthy offspring’s motivation to go their own way, leading to a lack of self-esteem and ultimately an unhappy life.
Research by psychologist Dr Suniya Luthar shows children of the super-rich are more likely to develop depression, take drugs and commit crime than their modestly well off counterparts. Meanwhile a survey of 120 individuals with a net worth of more than $25m, conducted by the Gates Foundation, found respondents believed money gave their children a “perverted sense of the world” or could prevent them from developing empathy. So for the super wealthy parent, raising well-adjusted children is incredibly challenging.
These challenges are particularly problematic for parents who want to pass a successful family business to their children. Will their offspring be equipped and motivated to take on the challenge adequately?
Just 30% of family businesses survive second generation ownership and that figure decreases dramatically to just 3% once the third generation takes hold. In my book Passing the Buck: How to Avoid the Third Generation Wealth Trap, I explore this phenomenon in more detail and discuss ways in which the family business can survive a succession.
Invariably the solution comes back to Maslow’s hierarchy of needs and looking beyond money to achieve happiness. Some of the world’s richest individuals – Microsoft founder Bill Gates for example – have used their wealth for philanthropic purists. Mr Gates famously said he will leave his multi-billion dollar fortune to charity rather than his children. Instead he has limited his expenditure to paying for his children’s education in the hope it will kick start their own careers.
Speaking on UK television in 2016, Gates said: “It’s not a favour to kids to have them have huge sums of wealth. It distorts anything they might do.” Not only can Gates improve his children’s chances of happiness by giving them their own self-worth, he can achieve more self-fulfilment through his own charitable work.
Happy multi-millionaires do exist but they used their material advantage to drive personal well-being. Ultimately –as Chanel correctly identified – the happiest people aren’t wealthy they are rich.
Significant wealth used skilfully produces a life of riches, pleasure, and extraordinary accomplishment. Used unskilfully it often produces the opposite.