6. Is Bill Gates cheap for giving his children $10 million dollars each?

Bill Gates is worth $100 Billion dollars, so it was quite a shock to many when he decided that he was only going to give $10 Million dollars (0.03% of his net worth ) to his three kids after his death. 

Many felt that it was simply unacceptable that the kids of one of the richest men in the world would be deprived of 99.97% of their family net worth. However, what many people don't understand is the actual financial impact of receiving $10 million dollars.

Instead of harping on the ability of the Gates family to give more to their kids, let's consider, as I am sure the Gates family has, the impact on the children's lives that this sum of money would have.

To understand this, let's use a custom financial model to understand what the impact of $10 million would be on the Gates kids and how that might alter or dictate the quality of life they have. 

First let's make some assumptions: 

Expected Household income: Let's assume, to start, that the children will never earn an income, ignoring for now any spousal contribution.

Expected household expenses: The average American household spends roughly $5,578 per month and $1,885 in housing (According to the BLS) To start let's pre-seed our model with this figure, more to contextual the spend and less to replicate what I assume is far higher levels of spend for the Gates family. We will also assume that the lifestyle itself doesn't increase in cost outside of natural inflationary pressures. Let's also assume that any spouse has no impact on expenses (ie. their income covers all their expenses).

Dependents: Let's assume that the Gates children will have kids when and to the magnitude (1.9 kids) of the national averages 

Expected Return: Let's assume that for now the Gate's kids have the same expected return as other households and will return roughly 7% annually in the S&P500. 

Now let's plug our figures into the model:

If given the $10 Million today, and the Gates kids live the lifestyle of the average American, but never work a single day in their life, their net worth will balloon in 50 years to $204 Million Dollars (roughly 20x more than they started with.)

What happens if we double or triple the children's monthly expenditures, effectively double or triple the average American lifestyle?

It turns out that each child, all else equal, will have $162 Million and $89 Million respectively after 50 years. With the expectation of this number growing exponentially into the future. 

It's not until we quadruple the average American expenditures (~$20,000 per month) and assume a lifestyle creep of 1%, do we see a tapering of net worth growth and a stop to their net worth growth (visual below). 

 

In this scenario, the Gate's kid's monthly expenses will balloon from $20,000 to $125,000 a month over the next 50 years, yet the Gate's children will increase their net worth to just shy of $25 Million, all without ever recording any income.

So what does $20,000 of spend a month buy? A $1-$3M dollar house and $10,000 in discretionary spend per month to start. Over time this turns into a $10 million house and $60,000 in monthly discretionary spend as their lifestyle expands.

This buys a 6 bdrm multifamily house with an indoor swimming pool in Manhattan, all without ever having to work a day in their lives. 

But let's assume they do work.

Let's say for instance the Gate's children do decide to take a white collar job paying a meaningful but modest $100,000 after tax annually. A job that is hard to get but presumably not for the children of one of the richest men in the world.

Making this small change, the Gates kids can now afford to spend $70,000 per month 3x as much as not having a job, which would grow to $466,000 per month. Easily affording a $30 million dollar penthouse in New York.

 Simply getting a job, would allow the Gates kids to expand their lifestyle by 3x. 

Conclusion: So what is the point? Why spend all this time modeling out the Gate's family expenses? I think there is three important financial lessons here: 

1. Generational wealth provides a significant leg up - an inheritance of millions of dollars can significantly change life and lifestyle choices and if managed properly can expand significantly over time, making work a choice for those who's inheritance is significantly large.

2. To illustrate the importance of building a sufficiently large net worth - For those that do not have a large inheritance, your target net worth is a function of your expenses and if modeled properly can fully cover all your expenses indefinitely. 

3. To suggest that maybe Bill Gates was trying to strike the balance between providing a financial safety net for his kids, while also ensuring that they had some incentive to work and achieve higher levels of success.

 Thanks for reading! If you liked what you read, check out our Medium or continue reading the other articles at hioutputblog.com. As always feedback, questions, and content submissions are more than welcome at submissions@hioutputblog.com.