Receiving an inheritance can be a mixed blessing. It is great to get money or property for free. The bad part can be how and why you received this gift. Losing a loved one is never an easy thing. Often times people who receive an inheritance respond in one of two ways. They either feel that they deserve or were somehow entitled to the money. This usually comes from a child receiving money from the passing of a parent within a wealthy family. The other popular response is to feel that you don’t deserve the money and experience some feelings of guilt about the money. This comes most often from someone who hasn’t come from money or is not used to handling large sums. Neither of these responses is ideal and can lead to money management problems. The good thing is that whether you are inheriting a lot or a little there are steps you can take to insure your inheritance is handled properly and to maximize your opportunities.
Let’s start with some smaller denominations and work our way up. If you inherit anywhere from a couple thousand up to ten or twenty thousand there are some practical day to day things to look at. If you don’t have at least 3 and preferably 6 months worth of living expenses put aside, this should be the first place to look. Use some of your new money to build up your savings. If your savings are in good shape, the next place to look is paying down your debt. If you are carrying a large amount of bad debt (debt with a high interest rate and no tax incentives) then please consider paying some of that debt down. The other option is to beef up your retirement plans. Especially if you’re young, the extra seed money contributed now can really add up over time. The last fun thing you can do is to use a little of the money to take a long weekend or get a massage. Reducing stress is good for the mind and body, and in this economy stress is in abundance.
I think my long weekend, or massage suggestion should apply to any amount inherited. Next is if you inherit ten thousand and up to about a hundred thousand. At this point you can take care of savings, paying down debt, and doing some additional investing. Now you realize that you still have some money left over and the idea of buying something new pops into your head. This is where you need to be careful. If you are going to upgrade something in your home, please consider the kitchen or bathroom. These are the areas that offer the best return on your investment when resale time comes around. If you are considering a new purchase, make sure it is something you need or is at least a little practical. Many people get caught in the trap of buying a new car and using the money as a down payment. This can still leave you with a monthly payment. Now your monthly bills are higher than they were before you inherited the money…not a good situation to be in.
Now we are up to the nice spot of inheriting an amount in the hundreds of thousands. At this point things start to change. Somehow people find out how much money you have come into, and will start approaching you about a gift or loan. You may feel that you can now afford to help these people. If they are family, you may even feel obligated to give them some money. This is the spot where I have to say from this point and up, in money, you need a good advisor. If you do not have one, please go get a good one. Your current advisor may be fine for this task, or you may need to upgrade. Whatever your situation please discuss with the advisor what your situation is, what you need help with, and what you expect out of the relationship. Having the “wrong” advisor for your situation can be as bad as not having one at all. Now the reason you want an advisor is partially for scapegoat duty. When someone approaches you for money, you can kindly let them know that you would like to help them, and may be able to, but your hands are tied until you go over it with your financial advisor. It is a nice out, can give you time to review the situation, and may save you from making a mistake. With this amount of money, you feel empowered to help people but you have to be careful. It may seem like a lot of money but you can burn through it quickly. Investing in someone’s business as appose to a gift is also a risky proposition and should be viewed as a gift regardless. If you can get your principal back and turn a profit, wonderful… but if not, you won’t be let down.
Besides people approaching you for money, this amount of inheritance can affect your tax bracket. You will need to talk this over with your financial advisor and accountant to avoid any tax missteps. This is also a great opportunity to review your retirement game plan. If you are behind, this money can help you catch up. If you are on track this money can help you retire earlier then originally anticipated. Perhaps help to pay for more of your kid’s college, or be philanthropic. Giving money to charity isn’t just for the rich anymore. For just a couple thousand dollars for a few years, you can give a gift in the hundreds of thousands of dollars to your favorite charity. That same concept can be used to leave more money to your family when you pass away as well.
Now we are into the big boy money of inheriting millions. This is a small club you have just entered and statistics show if you inherit in the millions there is a good chance that you were a millionaire already. This may mean business as usual or a radical life change. If you already have this level of money, you know how important a good advisor can be. If you are new to this level of money, then you need to get a good advisor and accountant immediately. Now you are in the territory where you can hold property and business interests in addition to your equity positions. This is also the spot where you can start utilizing trusts to maximize your wealth, charitable giving, and inheritance to your own family. There really is a whole new world of opportunities now opened up to you in relation to your investments and ability to help others. Now here comes my cautionary tale. If you are working please do not quit your job. Once you meet with your professionals and get your plan together, then you can look into perhaps switching jobs to something you enjoy if your current job is not fulfilling. But please do not quit your job. Many surveys show that people who win the lottery or inherit large sums of money are prone to quitting their jobs. They are also prone to burning through their money, and ending up back at their jobs in just a few years, with less money then they started with. So please keep your job, don’t go crazy with your money, and get some good professionals around you. In cases like this, you may need to be protected from yourself, so you can make your new found wealth last.
Whatever category you fall into, I hope these guidelines will help direct you. There can be some great opportunities, but also some unforeseen problems in your path. Be smart, be grateful and pace yourself. Combining common sense with professional advice can make your life easier and more rewarding. Until next time, happy investing.
