Earned Wealth vs. Inherited Wealth: Should You Have Different Investing Strategies for Both?

How should people approach the management of inherited money, and should their strategy be any different from those who don't have such a windfall? Moreover, if you're fortunate enough to inherit a fortune and also have a successful career or business, should your approach to investing differ for your inherited wealth versus your earned income?

The answers to these questions are complex and depend on various factors, including individual risk profiles, needs, attitudes toward money, and personal preferences. For those who inherit significant wealth, the primary focus often shifts to wealth preservation.

Wealth preservation is crucial for those with substantial inherited assets, aiming to protect and maintain their value across generations. It's essential not only for the continuity of wealth but also for managing the assets efficiently, ensuring they are safeguarded against risks like inflation. Proper wealth preservation strategies can help protect inherited money, utilising various financial management and taxation methods.

Defining Earned Wealth

Earned wealth is money or assets gained through efforts and services actively applied rather than passive income or inheritance. It commonly comes from salaries or any work-derived activity in which time and abilities are traded against monetary compensation. Earned wealth signifies commitment and value-creating capabilities in contrast to inherited or unearned wealth. Not only does it create financial independence, but it also gives a feeling of success and security. Creating earned wealth is often based on continued effort and sound investments to provide long-term development and stability for the future.
 

Defining Inherited Wealth

Inherited wealth is the money or assets transferred from one generation to the next, commonly through family heritage. This is a legacy without the immediate labour of the recipient. It may include cash, property or companies. Financial stability and a lifetime advantage in life or business are often conferred by inherited wealth. It also leaves responsibilities such as maintaining and improving the assets. The inherited wealth meaning captures family traditions and impacts long-term financial security across generations.
 

Why Preserving Inherited Wealth Matters?

Managing inherited wealth tends to revolve around preservation, a top priority for old money elites who inherited substantial assets from parents or close relatives. Preserving wealth is usually ignored both during wealth accumulation and intergenerational transfer. Older people generally like limited interest income on saved assets, whether inherited or earned. Young earners are risk-takers who use capital markets to increase wealth exponentially. The goal of preservation is to protect investments so they can be handled passively and protected against inflation using sound tax and financial management techniques.
 

Should You Have Different Investing Strategies for Both?

Various investing approaches are frequently required when it comes to earned wealth compared to inherited wealth. Earned wealth tends to be more risk-taking in nature because it is continually replenished by active income. Hereditary wealth requires a conservative approach. It emphasises preservation and consistent returns to protect the family fortune for future generations. This typically entails diversified portfolios and inflation protection. Equilibrating growth and security becomes critical for inherited wealth, whereas earned wealth denotes personal labour. Specific solutions for both can provide stability and long-term wealth.

Strategies for Wealth Preservation

So, what is the best strategy that a person can employ to protect their wealth in the long term?

Frankly, there is no straight answer to this question, as it depends on a person’s individual circumstances.

Depending on one’s goals, only then can one actually decide on how some or all of these strategies will benefit one’s situation currently and in the future.

Having said that, there are some general strategies that one can follow in order to try and preserve the value of one’s inherited wealth.

Diversification

The dictum of diversification holds good both for building wealth as well as for efficiently protecting inherited assets. As goes the old saying, “Don’t put all your eggs in one basket.”

Investors with large sums of money, whether inherited or earned, should diversify their assets across all major asset classes—debt, equity, gold, real estate, and even art and alternate investments. Not only will this help them maximize their returns, it will also help them hedge against losses in one or more asset classes at different points in time.

Asset Allocation

While diversification across different asset classes is one thing, asset allocation is quite another. Asset diversification sector-wise means spreading investments across sectors like technology, healthcare, finance, real estate, energy, and even newly emerging sectors like digital assets. This reduces concentration risk and allows gains in one sector to compensate for losses in another. A proper asset allocation can not only help hedge against inflation but can also ensure that the well-diversified portfolio keeps beating inflation over the long term and therefore keeps compounding.

Most nouveau riche investors are often not particularly well-versed with the concept of asset allocation, while mature investors, who belong to the old money elite, are smarter with their money.

Goals

The essential aims of investors are as follows:
 

• Skipping Certain Financial Steps

Active earners depend on goal-oriented investing. This wealth was gradually accumulated over many years. Knowing how to manage inherited wealth enables individuals to skip some of these steps to reach objectives much sooner.
 

• Less Dependence on Insurance

Insurance assures financial security for individuals who have only earned wealth. But a sizable inheritance already provides security. It leaves little need for costly life or health insurance policies.
 

• Better Education Opportunities

Inherited wealth simplifies paying for higher education for yourself or your kids without the expense of student loans. It opens up greater career possibilities.
 

• Owning Real Estate Without Loans

Ample inheritance enables you to purchase a good home in the best location without requiring a home loan. It enhances your standard of living while providing assets for future generations.
 

• Freedom and Smarter Asset Allocation

Families can invest in active income more liberally and aim for compounding growth with inherited wealth. Old-money families master the art of asset allocation and make their wealth endure.

Generational Wealth

Most households struggle to build long-term wealth to meet all their goals for one lifetime. But when you have an inheritance, you can future-proof your family and build generational wealth that can last several generations. This can be done by creating private family trusts that can hold assets, which can then be passed easily from one generation to the next.

In fact, an inheritance allows you to take a long-term view of financial goals without the need to worry about any short-term volatility or setbacks. You also don’t need to worry about timing the stock markets or indulging in undue risks that could erode large portions of your hard-earned wealth.

If you have had a long-term dream of starting your own business, an inheritance can help you take the plunge, knowing well that any potential failure is hedged financially.

How Do Investing Approaches Differ Between Earned Wealth and Inherited Wealth?

Investment strategies do differ naturally when comparing inherited wealth vs earned wealth. Earned wealth is worked for over time, either from salaries or professional labour. Investors tend to use goal-oriented methods because they accumulate slowly. It emphasises long-term growth and risk-balancing stability. Inherited wealth gives an instant monetary cushion and enables investors to emphasise preservation and cautious deployment to protect family legacies.
 

Risk tolerance is a primary consideration. Individuals with earned wealth might assume higher risk in equities or startups to achieve exponential growth. Inherited wealth is typically preserved conservatively through diversified portfolios or tax-advantaged vehicles. Knowing how much wealth is inherited vs earned explains these decisions. Earned wealth requires growth-inclined investing, while inherited wealth focuses on protection and continuity. Both approaches indicate how the source of money influences financial strategy.
 

Combining Growth and Preservation Goals

Blending growth and preservation objectives is crucial to achieve long-term financial stability. Preservation seeks to protect invested funds from inflation and market volatility. Growth focuses on accumulating assets through stocks or high-yield investments. A balanced approach combines both to invest a fraction of the portfolio in growth-type investments and a second part in secure assets such as bonds or fixed deposits. This method provides that not only does the wealth grow, but also stays safe for the needs of the future. Investors can have financial liberty now while keeping resources for the next generation intact by intertwining growth with preservation.
 

Conclusion

You have to be lucky to get an inheritance. But those of you who do come into such luck should make judicious use of that money and make it work for you such that your life and that of those coming after you becomes better.

Whether you have an inheritance or have accumulated your own earned money, you need to make sure that the pot of wealth is safe from prying eyes of other family members, friends, or anyone else who may try and gain control over it. It is common for those around you to make demands on your inherited money when they see you have come into big money. It is therefore your duty to protect your money and put it to use judiciously, whether you have earned it or inherited it.