Receiving a large inheritance may be both a blessing and a curse in terms of finances. It’s also a highly emotional experience since it implies you’ve lost someone dear to you.
One of the concerning statistics we’re seeing is that 70% to 90% of folks who inherit a big chunk of wealth will fire their parents’ financial advisor.
If you are an heir to someone’s will, you will receive an undisclosed sum of money shortly. You face the danger of losing your money as soon as you get it if you aren’t cautious. The main issue is what you can do with the money you inherited and how you should approach the circumstance.
But you’ve come to the right place. Keep reading to learn what to do and avoid once you’re dealing with a large inheritance.
Managing a Large Inheritance 101: Don’t Switch Financial Advisors
The financial adviser you inherited with the money probably helped your parents become wealthy or, at the very least, kept them wealthy. When heirs meet with new advisers, they are virtually always urged to alter their habits.
What is the typical outcome? The inheritance’s disappearance. These statistics indicate that young heirs should think twice before dismissing the counsel and knowledge that helped their parents build their wealth.
Take a Breath Before You Spend
When individuals inherit money, the first thing they do is search for ways to spend it. Some people spend their money on new clothing, a fancy vehicle, a European trip, a beach home, and so on until they run out of money.
Rather than racing to the mall or the auto dealer, young heirs should take some time to assess their financial position. This effort will provide you with a clear picture of your entire financial situation, including income, expenditures, assets, debts, and obligations.
Hiring a financial adviser who can objectively assist you in managing your money is the greatest approach to assessing your financial position. Although hiring someone to tell you what to do with your money may feel like a betrayal of your pride, these professionals are recognized specialists in making money and preventing you from losing it.
Start by Paying off Debts
Examine your balance sheet after you’ve finished your financial review. Using your inheritance to pay debts down or off may be a smart option. This will free up future cash flow, lower your expenditures, and save you money that may go toward loan interest payments.
Consider debt to be a reverse return: a 15% return on a stock is fantastic, but a 15% annual interest rate on debt is a horrible investment.
While some may debate the merits of Good Debt vs. Bad Debt, no one has ever gotten into financial difficulty because they had no debt at all. Conservative investors, when given the option, prefer to pay off debt.
Make Investing a Priority
It’s time to invest once you’ve paid off your obligations. You may put your newfound money to work by following the “pay yourself first” concept. You give your inheritance a chance to grow by investing in it.
Your financial adviser will be able to assist you in making smart investments. For most individuals, the best thing to do is to invest broadly in a big basket of funds that provide a steady return over time. It is seen as a secure investment and is often the best option for young individuals who have inherited money.
Also, you can always refer to the best law firm if you’re worried about how to set up your smart investments. You can view more from Heard and Smith here.
Splurge With Purpose
Now that your obligations have been paid off and your assets have been invested, it’s time to relax and enjoy yourself. You may spend on that new vehicle or beach vacation if your investments generate a regular income stream.
Or, you may have really struck the jackpot and inherited a pool of money so big that you’re debt-free and have enough money left over each month after paying your expenses. As with any other choice, consult your financial adviser first.
But don’t go overboard. You don’t have to purchase a few samurai swords or a garage full of exotic racing vehicles just because you can.
Wise investors are known for their prudence and moderation.
Another thing to consider: if you selected your profession based on its income, inheriting a large sum of money may allow you to pursue something else you’ve always wanted to do, such as paying for the schooling required to become a college professor rather than a portfolio manager.
Leave Something Behind
Your inheritance is a gift that, if handled correctly, may have a long-term beneficial effect on your life. Continue the tradition if you can by planning to leave a substantial bequest to your heirs or favored charity.
Remember that inherited money has a poor track record in terms of longevity, so make sure you do justice not just to what you’ve got but also to future generations.
The second generation loses around 70% of the wealth, while the third generation loses 90%. You may honor your donor and pleasure your heirs by being a responsible steward of what you’ve inherited if you’re fortunate enough to inherit a nest egg that someone else worked hard to create.
Manage your inheritance with care, pay it forward, no matter how big or little it is, and ensure that you have enough retirement savings.
Cracking the Code on Large Inheritances
We know how overwhelming a severe shift in your financial state can be. But, we hope that our guide has shed some light on the things you need to do once you receive a large inheritance and the main pitfalls to avoid. And, if you enjoyed reading our article, you’ll want to check out our additional tips and tricks, all available in our finance and lifestyle sections.