Rags to Riches to . . . ?
You shouldn't break the First Law of Money Management even after you die
Image by Brandi Day from Pixabay
That law is:
Spend less than you earn.
You can't depend on anybody else, especially after you die.
The great business magnate Cornelius Vanderbilt told his son Billy: "Any fool can make a fortune. It takes a man of brains to hold on to it."
Somehow, I just learned the incredible story of the Vanderbilt fortune - even though I've seen the name of Cornelius Vanderbilt in many of the American economic history books I’ve read.
The lesson today, boys and girls, is how to fritter away the largest fortune on Earth in just 50 years.
The Commodore Built that Fortune
Also known as the Commodore, Cornelius Vanderbilt was descended from a Dutch farmer who emigrated to New Amsterdam in the 1600's as an indentured servant.
Cornelius Vanderbilt started out life as a farmer's son on Long Island.
At the tender age of sixteen, Vanderbilt borrowed $100 from his mother to buy a single ferry boat.
Of course, $100 in 1810 was worth a lot more than now - around $2100.
Still, almost everybody could come up with that if they really wanted to.
Vanderbilt did have the advantage of having worked since age 11 in the ferry business run by his father.
He used his ferry boat profits to go into the steamship business, which made him a massive fortune.
But he believed railroads were the future, and so therefore expanded into that industry.
His New York Central and Hudson River Railroad was one of the largest railroads in America - and one of the first major American corporations.
By all accounts, Vanderbilt was greedy and ruthless.
He did treat customers well - and also did whatever he could to drive his competitors out of business.
By the end, Vanderbilt had accumulated the largest fortune in Gilded Age America.
When he died in 1877, he was worth around $105 million -- roughly equivalent to $2.5 billion today.
He owned 1 out of every 20 US dollars in circulation - more than the United States Treasury.
Vanderbilt Lived in Pre-Progressive Era America
Vanderbilt built his businesses when there was almost no regulation - or labor laws.
And he never had to pay income taxes.
Kiss Your Family's Fortune Goodbye
Yet, a mere 50 years later - by the late 1920's - Vanderbilt's descendants began selling off mansions and other assets to raise cash.
The Great Depression hit them and their businesses hard, and the erosion of the Commodore's massive fortune went into high gear.
By 1973, when a group of 120 Vanderbilts held a family reunion, none of the attendees was even a "mere" millionaire.
Some of the accounts I researched about this blamed the decline on family members having to pay income and inheritance taxes.
Boo hoo hoo.
Poor babies, having to pay income taxes.
Besides, many wealthy families have managed to remain wealthy even while paying at least some taxes (though they do know how to avoid or evade a lot of taxes.)
That's Why I Tell You
Buy stocks that pay dividends - and live on the dividends.
Even better - reinvest at least 10% of those dividends, so your dividend income keeps growing. You always have more shares of stock paying you dividends because you buy more shares with every dividend check.
Vanderbilt Lived a Relatively Modest Lifestyle
That is, considering he was the wealthiest man on Earth.
After his first wife died, he married a second woman. She persuaded Vanderbilt to donate $1 million to a relative of hers, for Vanderbilt University in Nashville Tennessee.
Back then, that was the largest charitable donation in history.
Still, on the whole, Vanderbilt obeyed the first law - even before he had fortune.
Vanderbilt's Son
William (Billy) received 95% of the estate even though he had several brothers and nine sisters. He got an 87% share in New York Central.
The family fought over the money, shockingly. Some of the girls claimed their father hadn't been in his right mind when he made that will.
They alleged Billy paid a spiritualist to influence Cornelius. The full story of that would make an interesting book.
Eventually, Billy did establish some trust funds for his siblings, but they were certainly small potatoes compared to the giant wad he received.
And remember the times. Cornelius's heirs didn't have to pay inheritance taxes.
Billy did manage to double the family's fortune by the time of his own death in 1885 - making him the most business-savvy descendant.
Although reportedly not as aggressive as his father, he did watch small expenses carefully.
Upon Billy's death, his two eldest sons received 1/2 each of the estate.
Buying Status While Neglecting Business
Alva Vanderbilt - wife of Willie Vanderbilt (Billy's son and Cornelius's grandson) - went through much of the Commodore's money single-handedly.
She badly wanted to be accepted by the social elite of New York City, the List of 400.
That's REAL old money.
They regarded Cornelius as a socially unrefined, ill-mannered brute, and his upstart new money descendants had to earn their acceptance.
So Alva built the largest mansion on Fifth Avenue's "Millionaire Row," and held fancy parties and balls.
The ball she put on after completion of the mansion cost $250,000 - more than $6 million today.
Other members of the third and fourth generations following Cornelius also spent money like it was going out of style. They built more Manhattan mansions and large country estates. That included the famous Biltmore - now a museum.
The Biltmore cost the equivalent of $1.5 billion.
They competed with each other over who could build the largest and most extravagant houses.
Alice Vanderbilt built the largest single family house in New York City.
Most of these were destroyed by the real estate developers who bought them.
The Vanderbilts all wanted to spend money instead of focusing on keeping - and growing - it.
William Vanderbilt helped manage the family's businesses until 1903. Then he put management of the railroads into the hands of another company - always a bad sign for businesses. He devoted the rest of his life to cultural activities and sporting events, such as yacht racing.
In 1930, the family opened Biltmore to the public. Though it was technically a private residence (and still is), charging admission fees helped them keep and maintain it.
By the 1930's, the railroad business had peaked. New York Central went into decline, and nobody in the family had the authority, business acumen and inclination to manage it back to prosperity.
They sold their New York Central stock in 1954.
Gloria Vanderbilt
The fashion icon, with her signature bluejeans, turned out to be the most entrepreneurially successful of Cornelius's descendants. That was despite - or, maybe, because of - a rocky start in life.
She was born to Cornelius's great grandson, Reginald Claypoole Vanderbilt - a notorious gambler and drunk.
Reginald blew almost all of his $15.5 million fortune.
At age of 42, after being warned by a doctor he'd die soon if he didn't stop drinking, Reginald married Gloria Morgan, a 17-year-old socialite.
Just a few years later, as the doctor predicted, he died of cirrhosis of the liver, leaving his wife and baby daughter to struggle.
While a child, Gloria was the subject of a well-publized custody battle between her mother (who apparently had major mental issues) and an aunt.
In adulthood, she became famous as a fashion designer and icon, and author.
Her son is Anderson Cooper, the CNN news anchor.
It's interesting how financial mindsets can go down through generations.
While promoting his book on the Vanderbilt family, Cooper said that when he was thirteen he overheard his mother tell a friend that she could always make money.
In other words, she had no plan or intention of saving and investing money so she would have passive income. She was relying on her personal efforts and business successes.
(I suspect Gloria had that attitude because she saw how depending on passive income from the family fortune ruined the lives of so many Vanderbilts, including her own father.)
Cooper says he knew that was a disaster, and it drove him to become a workaholic. At that age, he became a model.
What's Obvious
If you want to establish generational wealth that lasts longer than a few generations, you can't depends on your descendants to do that for themselves.
Although Cornelius thought "any fool" could turn $100 into a fortune, that kind of entrepreneurial drive is not the norm, even in his family.
And, as it turned out, his family lacked the men “of brains” who could keep the fortune. (And the most entrepreneurial of his descendants was a woman.)
If you're born to wealth, it must be that quite difficult to summon the ambition to turn $100 into a megafortune.
Why go to so much work when you already have a megafortune? Why not enjoy it?
Some of Cornelius's descendants did manage his businesses okay, but apparently none were entrepreneurial except Gloria. Why didn’t they expand into trucking and airlines? Cornelius would have.
His descendants ignored those opportunities.
Anderson Cooper appears to be quite hard-working, but he's not a CEO. He's achieved great success as a CNN news anchor, but that's not the same.
Some of the 3rd and 4th generations did worthwhile things with the money. They contributed to the New York Museum of Modern Art. One ran the Metropolitan Opera.
Conclusion
If you do have so much money you're starting a multi-generation fortune, you obviously need to learn a lot about it.
You'll need legal help to set up trust funds and family offices. Family offices are essentially privately owned and operated investment funds that manage a family's wealth for its members.
That's a field for experts.
Remember: family offices must be paid for, so your fortune must be large enough to justify the expense.
Most successful people are affluent, but not that wealthy.
Educating your offspring about spending less than they receive is essential.
Not to mention:
* Staying out of debt unless it's intelligent business debt (that is, you use it to make even more money)
* Investing for income
* Refusing to sell off income-generating assets
But how can you ensure your grandchildren, greatgrandchildren and so on don't give in to financial temptation?
I don't know, but this story of the Vanderbilt fortune makes me better understand why Bill Gates doesn't want to leave his kids too much money.
Or Follow Ric Edelman's Advice
He's a famous personal financial advisor and author.
He says: "Die broke."
Why should you work so hard for money only for your descendants to have all the fun of spending it?
Spend it ALL before you die.
NOTE: I’m just kidding. But Edelman means it.
My widowed mother's investments enabled her to live a comfortable lifestyle for over 50 years, beating the pants off the Wall Street gurus even though she couldn't have read a balance sheet to save her life.
Find out how.
Check out my Income Investing Secrets book right now
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