Unexpectedly Received an Inheritance? 6 Steps to Take NowSubmitted by Castlebar Asset Management on October 16th, 2018
Have you ever thought about what you would do if you received an inheritance?
What about other sources of “sudden wealth,” or financial windfalls that you might receive? These could range from a huge pay raise at work (or a significant increase in earnings through a new position), cashing out on equity compensation that skyrocketed in value, or even winning a small lottery.
Whatever way you get financially lucky to end up with a large sum of cash you didn’t expect, it can change your life on several levels. It obviously puts you in a different place, financially speaking. But it impacts you emotionally as well. Suddenly coming into money often acts like a steroid on your biggest character traits -- for better and for worse.
Whether or not you expected the inheritance you received or the windfall that came your way, one thing remains critically important: you need to be proactive about how you manage this money.
You need to get a strategy in place to curb emotional decision-making and to maximize this opportunity to secure your financial freedom. These are 6 actions to consider taking now.
1. Slow Down!
After you received an inheritance, you might feel tempted to immediately rush out and start buying things you’ve wanted for years but haven’t been able to afford. After all, a sudden influx of cash means you can fast-track the goals you’ve been trying to save up for over the last few years, right?
You could do this, but a better course of action is to slow down instead of trying to speed everything up. Whatever the circumstances surrounding this unexpected cash, there are likely some emotions involved: grief from a loved one’s passing; elation over your stock options turning out to be enormously valuable, and so on.
Give yourself some time to process those emotions before you try to make any financial decisions. The choices you make with any money -- be it a large or small amount -- are best made when you can think rationally and clearly. Emotions tend to cloud our judgment, so it’s worth taking a step back and not trying to figure everything out immediately.
2. Be Self-Aware
Again, coming into money suddenly and unexpectedly can bring out the best and the worst of your personality and characteristics. How many stories have you heard about lottery winners blowing their millions on exotic cars, gambling, and even drug addictions?
On the flipside, some people want to start giving away money to friends and family after they received an inheritance because that’s just their nature: they want to help others and give back. But that can also lead to squandered wealth that doesn’t go as far as it could have to help more people if you don’t put a plan in place first.
Or you could simply fall somewhere in between.
If you already struggle to keep your spending at a reasonable level, a sudden and massive deposit of cash in your bank account is going to be really difficult to avoid spending (when you should at least save and invest a percentage of it). If you already tend to hoard money to an extreme, that instinct could go into overdrive when you have a ton of it to squirrel away.
The solution? Know yourself. Recognize your own best and worst tendencies with money as they are right now -- and know that if you experience a financial windfall, those are the parts of you that will likely show up most.
3. Put a System in Place
Knowing yourself is important -- but it’s useless unless you do something with that knowledge. A good next step to take is to set up a system that you can use to manage your newfound wealth well, rather than just leaving it up to yourself to make good decisions in the moment.
The best system might come in the form of a third party who can remain objective, especially when you’re emotional. This is one of the big benefits of a financial planner: they can be rational when you’re anything but, and they can also help you set up a structure that allows you to make the most of this opportunity to do big things in you financial life (rather than squandering the opportunity to keep building on your new wealth).
With a comprehensive financial plan, you’ll have specific action steps to take right now and into the future. It’s not easy to manage a lot of money over time if you try to figure it all out on your own. The most financially successful people know this, and they use a team of experts to help them get to most from the wealth they build.
4. Take Care of Your Pressing Financial Priorities
Once you feel like you can manage your emotions and impulses, take an honest look at your financial situation. There may be a few obvious steps to take on your own, depending on what you find there:
Don’t have an emergency fund? If you received an inheritance or other windfall, use a portion of it to create a cash reserve that can cover at least 3 months’ worth of expenses.
Have high-interest rate debt? You might want to pay it off in full, especially if it’s carrying an interest rate of 15% or more (like most credit cards).
Behind on retirement? Now might be a good opportunity to fully fund your retirement plans, IRAs, or HSAs for the year.
Comb through your financial life and identify your needs and priorities based on where you’re at in your life. Then allocate some of your new wealth to addressing those.
5. Account for Taxes
It might not be something you want to think about, but remember that whatever cash you received is likely going to be subject to some amount of taxes. If you can account for that upfront, you can immediately set aside some of the cash to cover the tax bill it will generate.
That might not be very fun, but it will save you a lot of hassle when it’s time to file your taxes and you realize you owe thousands of extra dollars to the IRS that you already allocated somewhere else.
The specific rate you’ll be taxed at will depend on a number of factors, including the source of the cash and how it impacts your current tax bracket. Again, this is why it’s important to work with experts who can help give you all the right answers to questions like, “how much should I set aside to pay taxes with if I received an inheritance?”
5. Splurge (a Little)
But don’t worry: this isn’t all work and no play. If you suddenly come into a lot of cash, it’s okay to treat yourself -- just keep it in reason.
If you have $100,000 in sudden, newfound wealth, it might make sense to take $3,000 and use that for that dream vacation to an all-inclusive resort somewhere in the Caribbean. It’s not okay to spend $20,000 of it on shopping sprees and mindless purchases.
Even when it comes to your splurges, create a plan for your spending first. That will help ensure you make the most of all your dollars and get maximum value and happiness from them.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.