Receiving an inheritance is an example of a mixed blessing. You get an unexpected financial gain, but the reason is the death of a loved one. On top of complicated emotions, you may be dealing with the largest amount of money you’ve ever seen.
No one is born knowing how to deal with an inheritance, and few people are prepared to deal with it.
But if you’ve received an inheritance, you can take some steps to use the money wisely.
Decide who you will tell
Philosopher and scientist Francis Bacon once said:Reticence in speech is better than eloquence, and speaking kindly to those we deal with is better than speaking kindly or with good order.”
It’s hard to know what to say and how to say it, especially when you’re experiencing something for the first time. Furthermore, we live in a society where constant access to social media makes it easy to share your life.
You may be tempted to share your new status online. After all, the likes, hearts, and other emoji responses you get from sharing may give you a temporary endorphin rush. But sharing your complicated feelings online is likely to backfire. When a lot of people know that you have money, a lot of people will start asking you for money.
The last thing you need during a period of grief is pleading for money to help your husband’s cousin start his own beachside popcorn stand. Even sharing with close friends or family members may be unwise. Friends and family members may treat you differently if they think you have a financial windfall.
When you first receive an inheritance, share the information with your spouse and tax advisor. Even if your friends suspect you’ve received an inheritance, they don’t need to know how much money you’ve received.
Later, you may want to share the information with other financial advisors, your children, or charitable organizations you plan to support. Sharing may be the right choice, and you can always share more information in time. Instead of sharing everything at once, take time to decide who needs to know what.
Take some time
If you have a bias toward work, you may want to invest your inheritance immediately. Although it’s tempting, give yourself a little time to start thinking on your feet. It’s okay to wait six months or even a year before touching your inheritance money.
Use this time to grieve your loss, learn about investing, and identify a fiduciary advisor who can help you manage large unexpected gains.
You may feel ready to invest after a month or so. But after speaking with many people who experienced loss, almost everyone wished they had waited six months or longer. You simply cannot avoid what a big loss does to your mind, and you may not make the best decision even if you think you are.
So what do you do? Just keep the money parked in a savings account.
Avoid snake oil salesmen
You don’t need to rush to pay off debt or invest in the future. Even rushing to “get educated” can leave you vulnerable to snake oil salesmen. Life and annuities salespeople have particularly great sales pitches that may take you through a period of heightened emotions.
Whole life or an annuity may make sense for you, but take time to evaluate your options and get advice from a credit expert before making any big financial moves. Fiduciary means that the financial professional must have your best interests in mind when recommending a product or service.
After making unexpected gains, only take advice from fiduciary financial advisors. If the person can’t give you a clear answer about whether or not they are trustworthy, move on. Good advice will allow you to adapt in the future. Bad advice can leave you financially stuck for years to come.
If you have to spend some money right away, consult a certified financial planner (CFP) before spending a lot of money. A CFP can help you create a sustainable withdrawal strategy, so you don’t run out of money too early.
Follow the financial order of operations
A financial advisor can help you develop a tax-efficient plan to manage your inheritance based on your situation and goals. An advisor will help you take a comprehensive look at your finances and develop a detailed plan for using your money.
They will have the experience you need to make great decisions with inherited money. Most often, your advisor will guide you in following a reasonable order of operations that includes paying off high-interest debt, investing for retirement, designing a charitable giving plan, and more.
The financial arrangement of operations includes the following:
Providing an emergency fund. Saving for emergencies isn’t fun or exciting, but it gives you a solid foundation. With an emergency fund, you can weather a broken car, broken bones, job loss, or other financial disaster.
Pay off debts. If you have debts, an inheritance may help you pay them off. Depending on the size of your debts and your inheritance, you may be able to erase all of your consumer debt.
Investing for the future. A well-diversified investment portfolio can help your inheritance grow. Even if you need some money today, investing can ensure you’ll still have money a decade or more into the future.
Give charity. Donating money to charitable organizations can be a way to enjoy your new wealth, honor the person who has died, and build a better future. And maybe you can give more than you ever have. But don’t start giving in a scattered way. You may be able to make a profound impact through well-designed charitable giving. A financial advisor can help you plan a tax-efficient giving strategy. They may advise you to use a Donor Advisory Fund (DAF) or other structures to maximize your giving and minimize taxes.
Enjoy your inheritance now and in the future. You don’t want to waste your entire inheritance on low-budget vacations, Amazon purchases, and Uber Eats deliveries. But this does not mean that your inheritance funds are blocked. Instead, think of high-impact ways to spend money that you and your family will enjoy.
Stick to the plan
Preserving and growing wealth over time is not magic. But a good plan from a financial advisor is not enough to help you grow wealth. You need to stick to the financial plan you create. Overspending, especially purchasing big-ticket items like recreational vehicles, homes you can’t afford, and cars, can lead to declining wealth.
Stick to your financial plan. Make sure large purchases are part of your financial plan before you sell hundreds of thousands of dollars worth of assets to fund your lifestyle.
Take the final
Regardless of the source of your financial gains, the money you received is now under your control. Take your time, consult real financial experts on your side, and stick to your plan. When you take these steps, you have the best chance of enjoying your inheritance, growing your wealth, and using your money in meaningful ways.
