Spenders

One couple is still working, earning dual professional incomes, as they approach retirement age.  They make good money and spend it.  Although both partners have pensions that will replace approximately 60% of their incomes in retirement, they have not accumulated enough in their private retirement accounts to allow them to fully retire at their current standard of living.  When the time comes, they plan to draw their pensions and continue to work at least part-time, if not full-time.  They have no intention of downsizing their lifestyle in order to stop working.  The inheritance they received funded the cash purchase of two, brand new automobiles.  They spent this windfall just as they had spent every other chunk of money that had come their way.  This couple was thrilled to be without a car payment for the first time in their adult lives.

Savers

The other couple retired in their late 50′s.  They still live in the only house they ever purchased back when they were in their late 20′s.  The car they drive is 10 years old but is in immaculate condition and has low mileage.  They live off of a combination of pension and interest income.  Normally, the inheritance money would have been added to savings to provide additional interest income just like every other windfall they have ever received during their years together.  But with their interest income shrinking due to decreasing interest rates, this couple decided to use the inheritance to diversify their investments in hopes of earning a better return.

They used $30,000 of their inheritance to make a down payment on the purchase of a duplex rental property.  The balance of the inheritance was set aside to pay for repairs and other expenses related to the rental property and to cover the mortgage payment in the event one or both of the rental units were vacant for any length of time.

One couple spent their inheritance, which is what most of the people we know have done.  The other invested it.  Both acted according to their values.  Neither is right or wrong.  However, their decisions do have an impact on their ability to accumulate wealth.

Depreciating assets vs appreciating assets

The first couple eliminated a car payment, and that did have a positive effect on their monthly cash flow.  However, that was more than offset by the fact that they purchased a depreciating asset.  Those cars will lose approximately 25% of their value in the first year.  That’s over $12,000.  It’s impossible to build wealth with depreciating assets.  Of course, if they re-direct the money they had been using for car payments into their retirement fund, they will have taken a positive step in the direction of wealth creation.  Given their history and values, however, that car payment money will likely be spent.

The other couple invested their inheritance in an income-generating asset that will also appreciate in value, if given enough time.  The duplex is estimated to produce about $500 per month in extra income, after the mortgage payment and expenses are taken into account and allowing for normal vacancy.  That’s a 20% annual return on the $30,000 they put down to obtain the property, and it doesn’t count the equity they are building with each mortgage payment and through appreciation.

A matter of perception

It’s decisions like these made over a lifetime that determine the extent of a person’s accumulated wealth.  There is a reason why people with similar economic backgrounds and incomes have such varied financial outcomes, why some successfully accumulate wealth while others end up with little or nothing to show for years of labor, and it has nothing to do with fairness.  It often comes down to perception:  Some perceive money as a means to acquire immediate material comforts and luxuries, while others perceive money as a means to make more money.  Some spend their money.  Others choose to put their money to work.

If you’re struggling to accumulate wealth or you’re not happy with the level of wealth you have attained, remember A Tale of Two Inheritances and change your perception of money.  In other words, stop spending and start saving and investing.

K.C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages