So you just got a big inheritance and you don’t know what’s next. Or maybe you do, but you want to avoid making mistakes. While inheritances can be a huge blessing, there are a lot of pitfalls which usually start with people making bad or uninformed decisions. Oftentimes, the excitement and seemingly potentially large amount of the inheritance can make you squander the money. Because in your head, the money is inexhaustible. This is not the case. And after a few months, you can’t point to what you did with your inheritance.
Let's look at the biggest mistakes you can make when receiving an inheritance and how to avoid them.
Neglecting Professional Counsel
You might think you know what you should do with your inheritance, but chances are that you will overlook something. Fortunately, there are people that are trained to help guide you. The first and most important thing to do is put together a financial team. Almost all mistakes that you can make after receiving an inheritance can be avoided if you have experienced people working with you. So, hire an accountant, financial advisor, estate planning attorney, and any other professional you might need. Here are a few things your financial advisor can help you with:
Creating and helping implement a detailed strategy
Preparing cash flow forecasts
Setting and tracking financial goals
Making saving and spending a top priority
Reducing your tax liability
Illustrating what retirement might look like for you in various scenarios
Doing the research for you when it comes to perplexing and complicated issues
Making Emotional Decisions
Sometimes, we let our emotions get the best of us when it comes to our finances. This can become even worse when you’ve just received a huge inheritance. You might think there’s enough money to last forever. You might even get caught in the trap of trying to help people while neglecting your own finances. After getting your inheritance, the first thing on your mind might be how to help your family or friends that are currently in a tight spot. This can be damaging in the long run. No, this doesn’t make you a bad person, it makes you wise. An analogy I like to use is when the oxygen masks drop on a plane flight. They always tell you to put the mask on yourself before helping anyone else with theirs.
Hoarding Your Money
I’m not saying you should spend lavishly or indulge yourself in things you really don’t need. I’m talking about being too nervous to invest or take advantage of business ventures. You should know that if your money is not making you more money, it’s only a matter of time before it starts losing to inflation, not to mention non-discretionary spending.
Usually, people hoard their money because of the fear of making a bad investment or financial decision. You can avoid this by having a financial team and even doing your own investment research. If you've never invested before, navigating the financial world can be intimidating and overwhelming. Don't let this deter you from investing a reasonable percentage of your inheritance, nor should it urge you to invest it all just to get it over with.
Keeping an Inherited Asset You Can't Afford
Sometimes, your inheritance comes in the form of assets like real estate. This kind of inheritance can prove to be a bit difficult especially when you have an emotional connection with the property. You might want to hold on to it because it means something to you, even though you can’t afford to maintain it – upkeep, property taxes, HOAs, insurance, etc. You will know early on if you can’t afford the property for the long haul. If you can’t, it will inevitably have to be sold. You might as well do it before you lose all your savings.
Letting Go of Other Sources of Income
You may be tempted to quit your work or modify your lifestyle. An inheritance can appear to be a significant sum of money, but it can be easy to consume in a short period of time. You can avoid this mistake by working with a financial advisor. An advisor can forecast how long the money can last for you based on how much you spend.
Not Paying Off Debts
Sinking your inheritance into paying off a loan or credit card may not seem exciting, but if you have debt with interest rates that, if flipped around, would seem like a great investment, then you should rid yourself of that debt. It has to eventually be paid back, so you might as well save yourself the extra lost money that comes in the form of interest. Always consider paying off higher-interest loans first, such as credit cards, personal loans, and vehicle loans. The one exception to being debt free is your mortgage. Those tend to be the largest in value, and paying it off all at once might leave you “cash poor.” This is different for every person and is another great reason to connect with a financial advisor.
The point I am trying to drive home is that having a financial team there to help you make important decisions should be step number one. Unless you’re trained in finances, you can’t know all you need to know about making the most of your newly found assets. I gave you a short list of possible pitfalls, and this is just the tip of the iceberg. Whomever left you the inheritance, I’m sure did it because they were looking out for your future. Fulfill their wishes by making it benefit you as they intended. That might mean asking for help if long-term investing is unfamiliar territory.
Written by Eric Keating