Receiving an inheritance, whether expected or unexpected, is a bittersweet experience. While the extra money (or assets) may feel like a stroke of luck, it also comes with a major responsibility: determining how to use it wisely. Unfortunately, there are many ways to waste it quickly.
Inheriting money can be a chance to sort and secure your future, but it can also lead to poor decisions that leave you worse off than before. If you’re unsure what to do with the money, it’s best to discuss it openly with the other people involved, like a partner or family member. A financial advisor can also help you maximize the use of these new funds without wasting them on frivolous spending or unnecessary taxes.
To make the most of your inheritance, here are 15 common missteps you should avoid, confirmed by wealth management experts.
1. Spending It All Right Away
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The sudden rush of money might make it tempting to upgrade your lifestyle immediately. However, rushing into big purchases without a solid plan can be a huge mistake.
Inheriting money can bring a range of complex emotions. Take the time to process these feelings and gain clarity before making any major financial decisions. Put the money in a secure savings account where it can earn some interest while you create a thoughtful financial plan.
2. Keeping It All a Secret
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If you’re married or in a serious partnership, hiding an inheritance can damage the trust within your relationship. Financial transparency is vital for a healthy bond.
Money-related secrets can lead to resentment and conflict. Significant life events, like an inheritance, should be navigated together. Talk openly and honestly with your spouse or partner about the inheritance, your joint financial goals, and how you can work together.
3. Quitting Your Job
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While the fantasy of quitting a job you dislike is tempting, doing so after an inheritance is often a recipe for regret. Your inheritance might seem large, but it can disappear alarmingly quickly without a careful plan for its use. Leaving your job without another lined up or planning to start your own business can create unnecessary financial strain.
Think about how the inheritance can improve your life while maintaining your income. Consider using the money to upskill, start a side hustle, or pursue a more fulfilling career with lower pay.
4. Trying to Time the Market
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You might be urged to invest your inheritance and grow it exponentially. However, without experience and a sound strategy, attempting to “beat the market” is likely to backfire. Research shows that the average investor significantly underperforms market indexes due to emotional decision-making.
If you need to become more familiar with investing, consider working with a financial advisor who acts as a fiduciary. They can help you create an investment strategy that matches your goals and risk tolerance.
5. Lending Large Sums to Family and Friends
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Loaning money to loved ones might feel like the right thing to do, but this generosity can easily backfire. Mixing money and personal relationships can damage even the strongest bonds. When unpaid loans create resentment, it affects everyone involved.
If you feel strongly about helping, consider gifting a smaller amount instead of offering a loan. Be clear before handing over any money that it is a gift. If a loan is the only option, draw up a formal contract specifying the repayment terms.
6. Paying Off ALL Your Debt at Once
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While getting rid of debt might sound appealing, it’s not always the smartest financial move. Certain types of debt could be strategically advantageous. Low-interest debt, such as student loans or mortgages, can be used as leverage while your inheritance grows through investments.
Carefully consider your debt’s interest rates. Prioritize paying off high-interest credit card or personal loan balances, but consult a financial advisor before eliminating low-interest debt.
7. Buying a Fancy New Car
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Cars are depreciating assets. Spending a large chunk of your inheritance on a vehicle can significantly erode your newfound wealth. The average new car loses 20% of its value in the first year of ownership. Your inheritance could be better spent on something that will hold value or grow over time.
If you need a car, opt for a reliable pre-owned vehicle. Look for models with a strong record for longevity and a low cost of ownership.
8. Ballooning Your Lifestyle Expenses
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Upgrading to a larger home, buying designer clothes, and indulging in expensive hobbies can feel exciting. But, without a significant increase in your income, this can create an unsustainable situation where your inheritance quickly dries up.
Lifestyle inflation can lock you into a cycle of higher spending. If your income doesn’t increase to match your new spending habits, you’ll put your long-term financial security at risk. Before increasing spending, consider the long-term consequences. Determine what truly matters to you and allocate your resources consciously.
9. Investing in Things You Don’t Understand
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The hype around certain investments, from cryptocurrency to trendy stocks, can be seductive. However, putting your inheritance into something you haven’t deeply investigated is a major gamble. Investing without education and research is more akin to speculation than intelligent financial planning. Research shows that overconfident investors are more likely to make impulsive financial decisions that lead to losses.
Commit to learning about different investment options before using your inheritance. Consult with a financial advisor to build a diversified portfolio that aligns with your goals.
10. Pouring it All into a Single Investment
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Even if you find what seems like the perfect investment, putting all your eggs in one basket is incredibly risky. Market downturns can happen, even to stable assets. Diversification is a key principle of smart investing. Spreading your money across various investments mitigates risk and can improve your long-term returns.
Consult with a financial advisor to discuss an asset allocation strategy. They can recommend a mix of stocks, bonds, real estate, and other investments tailored to your circumstances.
11. Making It Rain on Others
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Buying extravagant gifts and constantly treating friends and family feels generous, but it can do more harm than good in the long run. While generous, this behavior can create dependence. It’s important for those you love to maintain their own financial independence and ability to self-sustain.
If you wish to help others, consider options like funding their education, providing resources for starting a business, or helping them invest for their future.
12. Neglecting Your Own Estate Plan
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An inheritance is a stark reminder of your mortality. While ignoring estate planning might seem easier at the moment, it could create serious problems for your loved ones. Having a will, trusts (if appropriate), and updated beneficiary forms ensures that your assets go where you want them to. It can prevent costly legal battles and family disputes.
Contact an estate planning attorney to help you create a comprehensive plan. It’s one of the best ways to ensure your inheritance is used for your intended purposes.
13. Falling for “Get Rich Quick” Schemes
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Inheriting a large sum of money can make you a target for financial scams. Be suspicious of any investment or opportunity that promises sky-high returns with no risk. Scam artists play on emotions like greed and the fear of missing out. When something seems too good to be true, it almost always is.
Exercise healthy scepticism. Research all potential investments thoroughly. Never rush into decisions based on high-pressure sales tactics.
14. Replacing Purpose with Possessions
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Retail therapy might provide a temporary dopamine rush, but it won’t fill an emotional void. Be wary of filling a lack of purpose or fulfillment in life with material possessions. Stuff won’t bring lasting happiness. True fulfillment comes from aligning your life with your values and finding meaningful ways to contribute.
Consider using some of your inheritance for experiences, travel, or personal and professional development. Explore interests or causes that spark a sense of purpose.
15. Forgetting About Taxes
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An inheritance might come with a hefty tax bill. Failing to plan for this can significantly reduce the actual amount that ends up in your pocket. Inheritance tax rules vary between states and at the federal level. There might also be income tax implications depending on how you utilize the inherited funds.
Speak to a tax advisor or accountant to understand the tax implications of your inheritance and strategize accordingly.