The 4 Best Things to Do When You Inherit Money
January 14, 2016 | Your Finances
By Amanda Reaume
In the next three to four decades, $30 trillion will transfer from Baby Boomers to their heirs, according to the consulting firm Accenture. While an inheritance can bring great opportunities, it can also present challenges for those who receive it. Some heirs may struggle to manage their sudden influx of wealth while also grieving the loss of a loved one. During this difficult time, it’s easy to make emotional rather than rational decisions.
Thayer Cheatham Willis, the author of Beyond Gold: True Wealth for Inheritors and a wealth counselor who advises on the psychological pitfalls associated with inheriting wealth, has seen many people struggle with guilt or identity issues after an inheritance.
“Contrary to popular opinion, inheriting money is not ‘Easy Street.’ If you want to handle it well, it requires time, attention and work,” she said. “It is not the fantasy that many people imagine.”
If you have recently inherited money or expect to inherit in the future, here are four ways to manage your new wealth wisely.
1. Heal and grieve first. After you receive an inheritance, the best thing to do is put your money in a savings account or another safe investment for any time between one month and one year. Allow sufficient time for the pain of your loss to begin to heal before you make any major decisions about the money. William Taylor, vice president of financial planning for Northwestern Mutual, cautioned that if you don’t give yourself time to grieve, “you may make emotional financial decisions.”
Dominique Broadway, a personal finance expert and money therapist, agreed. She has seen clients blow through their inheritances, including one young woman who squandered $100,000 in less than four months.
“This typically occurs when the individual is attempting to fill a void that the loved one has left,” she said. Before the young woman knew it, “the money was gone and she was back to square one. Still grieving the loss, but now also guilty for wasting her inherited funds.”
2. Pay down debt. Paying down debt is one of the first things you should consider doing with your inheritance. But Taylor also recommended looking at debt strategically and paying off only “bad” debt, or high-interest debt.
“Paying down credit cards with high interest rates or student loans with higher interest rates would be a good thing to do,” he said, but he cautioned against paying off all debt. You may want to think twice before paying off your mortgage, since in some cases the money could be put to better use in another investment. For example, you may make more in interest on an investment than you would pay in interest on your mortgage. Interest payments on your mortgage also have tax benefits.
3. Consider short-, mid- and long-term goals. Before deciding what to do with your inheritance, make a prioritized list of your short-term, medium-term and long-term financial goals. Try to find a balance between these goals, and allocate a portion of your inheritance to each.
You might want to spend a portion of the funds on something that will improve your quality of life now, such as buying a new house or car, or going on a trip with your family. But be careful that the temptation to spend now doesn’t jeopardize your medium- or long-term goals, such as helping your kids pay for college or saving for retirement.
In fact, using your inheritance to accelerate your retirement savings is one of the best ways to ensure it has a long-term effect on your life, Broadway said. You can increase contributions to qualified funds like a 401(k) or IRAs (just be aware of the annual limits on how much you can contribute), purchase annuities or invest the money in mutual funds, stocks or bonds. A financial professional can help you determine an appropriate allocation strategy based on your financial goals and risk tolerance.
4. Consult an expert. Whatever your goals, it’s a smart idea to contact a financial professional for advice on how to manage your inheritance so that it will have a lasting impact on your life.
A good professional will spend time with clients to “learn about their hopes and dreams” before creating a financial plan to help them get there, Taylor said.
“An professional can help you understand your inheritance,” he added. “Did you get property, stocks, bonds, life insurance proceeds or artwork?” If you’ve inherited an asset or investment, for example, it might make more sense to sell it than to hold onto it.
When it comes to finding the right professional, he suggested choosing a reputable company and asking an existing client for a referral.
With so many options, it’s not easy to decide what to do with inherited funds. Willis stressed the importance of understanding what you want and what motivates you.
“This is really a prerequisite for making good decisions based on values that you have identified and explored,” she said.
If you know you’ll be inheriting money or other assets in the future, start planning now by learning about how to manage your money, finding an professional and deciding what you want to do with the funds. Even if you don’t have an inheritance in your future, learning about money management is a smart strategy for everyone. According to Taylor, those who squander their inheritance often do so partly because they lack the financial education and preparation to deal with it. If you know that you’re not good with money, a financial professional is even more important.
“You can easily blow through that money if you don’t have someone watching out for you,” Taylor said.
Originally published on Northwestern MutualVoice on Forbes.com.
Amanda Reaume is a freelance writer and the creator of the blog Millennial Personal Finance. She is also the author of two personal finance books aimed at millennials: Money Is Everything and The Complete Guide to a Debt-Free Education.