Have you ever wondered what you’d do if you found yourself with an unexpected financial windfall, such as an inheritance? Chances are, you didn’t say what most Americans actually do — which is, basically, to blow it all.
That’s right. According to recent research cited by the National Endowment for Financial Education, an estimated seven in 10 people who suddenly receive a large sum of money will lose it all within just a few years. It’s not just a couple of bucks we’re talking about, either — $30 trillion is expected to transfer between baby boomers and their heirs during the next 30 to 40 years, according to a recent report released by consulting giant Accenture. That’s some serious cash.
For many Americans, a modest inheritance of even $5,000 has the potential to change life for the better, so long as the inheritor knows what to do with the cash. Sadly, many of us don’t. That’s why I turned to financial planners from around the country and asked them outright: What exactly should an heir do with a newfound inheritance? Here’s what they had to say.
Take time to grieve
An unexpected financial windfall — particularly if it was bestowed upon you following the death of a loved one — can often be accompanied by unexpected feelings of guilt. Many inheritors would much rather have more time with a beloved uncle than a bank account filled with his riches.
Still, Matt Adams, financial adviser and partner at registered investment advisory firm Money Methods, suggests inheritors honor the memory of the giver by being a good steward of those newly acquired funds. “It took sacrifice for the inheritor to acquire those assets,” he says. “Have a heart of gratitude and don’t blow the money.”
Of course, that’s often easier said than done, particularly if we don’t have experience managing money or if friends or loved ones have designs on your newfound wealth.
Keep mum about your newfound riches
Your true friends will be there to help you grieve, but it may be in your best interest to keep the details about your newly inherited wealth to yourself. Many inheritors are surprised by how quickly their circle of friends and family seems to grow once word gets out about their newfound riches. Particularly during a time of grief, when many of us can fall prey to poorly made decisions, you’ll want to know that your loved ones are there because they want to support you — not because they’re hoping for financial gain.
Sadly, that warning doesn’t just apply to your besties.
“As a former banker, I can tell you that as soon as your deposit hits your account, bells and whistles will go off, informing everyone from the teller to the branch manager,” says Jude Wilson, chief financial strategist at Wilson Group Financial. “They will all have opinions of what you should do with your money.” And, if you don’t choose your advisers carefully, those opinions could very well be at odds with what is in your best interest.
Seek out sound expert advice
Many inheritors don’t know how to manage a large influx of funds and, without the necessary financial know-how, it’s easy to make money mistakes. You may intend to take good care of your benefactor’s wealth, but “it can be stressful to figure out how,” says Wilson, who suggests new inheritors put together what he calls a “dream team” of advisers. This includes:
A financial planner who can help you develop a money plan that works best for you and your individual situation.
A tax planner who can help you work through and perhaps even minimize the tax implications of your newfound wealth.
An attorney who can help you navigate any potential probate issues.
If you find the idea of finding and hiring three new experts overwhelming, start with the financial planner. A good financial planner can help you identify any other experts you may need on your team. (See also: Ask These 5 Questions Before Deciding on a Financial Adviser)
If you just want someone to help you get started but don’t want to pay for ongoing support, you can get a financial plan written up for a one-time fee from a fee-only certified financial planner. “The cost can be anywhere between $1,000 and $5,000 depending on the scope of work and the experience of the planner,” says Taylor Schulte, financial planner and owner of Stay Wealthy San Diego.
Ultimately, though, make sure that you or the pro you’re working with understands what type of money you’re inheriting and how it should be treated. “It could be a major misstep to liquidate and spend qualified money from an IRA [or other retirement account], which would be taxed at ordinary income rates,” says Mitchell Bloom, financial planner, author, public speaker, and president of Bloom Financial.
Develop your money plan
Most of the planners I spoke with generally agree upon the steps new inheritors should take toward using their newfound wealth to build a financial base. Those include:
Pay off your high-interest debts. This is particularly true if you hold high-interest credit cards or other consumer debt, like loans issued by furniture stores or used car dealerships. Student loans and new car debt also falls within this category.
Create an emergency fund. This should amount to somewhere between three and six months’ worth of expenses and, ultimately, should be able to tide you over in the event of an unexpected financial catastrophe like a job loss or illness.
Boost your retirement savings. A financial boon can help fill the gap between falling short and being retirement ready.
In short, it’s far from easy to manage an inheritance. Make the most of the money your loved one left. That means using the funds to create a better life for yourself in the long run, no matter how much was passed down. It’s what your benefactor would want.