What Should I do with My Inheritance?

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Avoid these 6 common mistakes that can make it disappear!

At some point in your life you may have the good fortune to inherit money. Otherwise you may have a different type of windfall and “come into some money”. It could be a severance payment, lottery win or an IPO that explodes the value of your stock options. Making the wrong moves when you receive a large amount of money in a single transaction can lead to regret, stress and financial ruin.

In my experience, the hardest thing to do financially is to build significant assets. It takes time, patience and discipline for most of us. This allows someone to adjust to their wealth as it grows. If it happens all at once, most people are not prepared to deal with the freedom, options and responsibilities that come with having wealth. There is a law of human nature called “Parkinson’s Law” and one of its principles states: “Expenses have a tendency to meet or exceed income”. This is another way of saying that money burns a hole in your pocket.

Spending is much more fun than saving

All too often, when someone learns that they will be receiving an inheritance, their mind starts to roam to “all the things I want to do with that money”. Once someone starts to think about what they want to buy; a new car, house, vacation, etc., then the mind takes over and starts to justify the expenditures. Things like “I deserve it” or “I need it” become the basis of justification for spending that someone had managed to live their whole lives without. Once those thoughts start to move into your mind it is almost impossible to hold back the floodgates once the money is in hand.

In order to make the most out of the opportunity that you are being presented with, here are 6 things to make sure you don’t do, so that you can avoid living with regret for the rest of your life:

1. Don’t buy anything or pay for anything right away. I know how exciting it can be to have more money than you ever had before, but resist the temptation to spend it when you get it. You got along without the money this far in your life, waiting a few months won’t make your life any worse. Take at least 3 months, and preferably 6, after receiving your windfall, before spending (or investing) a dime. This one step, allows for time and perspective to set in and you will be able to think clearly and gain perspective, as to the necessity of a purchase or validity of an investment.
2. Don’t go off on a spree! No matter how much you will be getting or how bad things are for you at the moment, take some time to organize your thoughts and priorities. Do you have kids that will be going to college? Are you behind in saving for retirement? Does your house need major repairs?
3. Most people overestimate how far money goes. You think, “I can just buy this or spend some on that” and that there will still be enough left over to do other things, and then find out that they are woefully short. I have a client who, despite repeated conversations, blew through nearly $400,000 in just about 4 years (a larger apartment, trips and loans to friends mostly) in this manner, and is now facing some very difficult decisions in their retirement as money is running out and soon they will no longer be able to afford even their apartment.
4. Keep your good fortune to yourself. You will want to tell people of your good fortune, but once you do, they will start to come up with ideas as to how you can spend it. Those plans can often include them in your plans. This can also lead to broken relationships if you turn down their ideas or requests.
5. Never a borrower or lender be. If you forget number 4 above, you will be inundated with friends and relations who “just need a few thousand” to help them out of a tough situation or get a business off the ground. Too often, loans to friends and family members do not get repaid and then the lies and excuses can make for a miserable time down the road. You start to hear the rationalizations; “you can afford it” and “you have plenty where that came from”. This is the thinking that leads to those people not repaying their not repaying and feeling ok about it.
6. Don’t try to go it alone! This is where sitting down with a real financial advisor can provide you with huge benefits. Know which type of advisor you need to work with. I wrote recently about the different types of advisors and what they do, you can read that piece to help you decide. You probably want to avoid starting with investments. The temptation will be that the bank isn’t paying much interest, and an investment advisor or broker will point this out to you over and over. I would recommend a fee based holistic planner that will help you gain perspective and prioritize your thinking in a larger context. That clarity as to your desired results will help in your decision making in regard to investments, spending, estate planning, taxes, etc.

We only get one chance to get it right!

Remember the old saying: “act in haste, repent at leisure”. Most of us will only get one chance to get it right. If we blow it, it is gone. If you think about the first time you did almost anything in your life, you weren’t very good at it until you had coaching and practice, learning how to perform your best. The difference is this isn’t learning math, or a sport. This is your financial future! Mistakes here have real serious consequences beyond a bad grade or losing a game. Take the time to get it right. If we can provide you with resources to study, or assistance in clarifying your thinking in this area, contact us and we can help you get started.
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