When you’re on the receiving end of an inheritance, figuring out what to do with it can be tricky. Without a plan for managing your sudden windfall, it’s easy for the money to slip through your fingers, leaving you no better off than you were before. If you’re set to inherit a sizable chunk of change or you’ve recently come into some cash, here are some tips for using it wisely.
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1. Don’t Rush Your Decision
One of the worst mistakes people tend to make when receiving an inheritance is not allowing for a cooling-off period. Instead, they get in a hurry to spend without thinking things through. Parking it in a savings or money market account for at least a month or two gives you time to weigh your options. If you don’t trust yourself not to spend the money, putting it into a short-term CD that requires you to pay an early withdrawal penalty can help you keep your hands off.
2. Assess Where You Are
Taking an honest look at your current financial situation can give you an idea of what your next move should be. For instance, if you’ve got several thousand dollars in high-interest debt, using part of your inheritance to pay it off is a smart move if your monthly payments are preventing you from getting ahead financially. Once the debt is gone, you can start focusing on other ways to improve your situation.
Your priorities might look a little differently if you’re already debt-free. Beefing up your emergency fund, adding to your retirement savings or starting a college fund for your kids may be on the list of milestones you want to achieve. Figuring out what your most pressing financial concerns are can help you develop a blueprint for reaching your goals so you don’t end up wasting your inheritance.
3. Be Realistic About Your Inheritance
When you suddenly have more money to play with you automatically subject yourself to the dangers of lifestyle inflation. When things that you couldn’t afford before, like a new car or a luxury vacation, are finally in reach it’s tempting to spend, spend, spend. If you’re not careful, you could go overboard and before you know it, your newfound wealth has disappeared as quickly as it arrived.
Before you make any rash decisions, you’ll need to adjust your expectations when it comes to what you can really afford to spend. Unless you’re inheriting millions, quitting your job probably isn’t the best move. Even if you do become an instant millionaire, there’s no guarantee that you’ll stay one if you’re not practical when it comes to managing your finances.
4. Establish Boundaries
One of the things that inevitably happens when your net worth suddenly increases is that people will start coming out of the woodwork to try and share in the wealth. You may start getting calls from your bank or other financial salespeople trying to get you to invest in their products. Charitable organizations may contact you out of the blue asking you to make a large donation. A long-lost cousin could show up one day asking for a loan to start a business. Setting boundaries and learning how to say no can help you avoid being pressured into making the wrong move.
5. Be Proactive
Getting a substantial sum in your inheritance can be overwhelming and you may want to get professional help if you’re not sure how to handle it. While it’s perfectly fine to hire a financial advisor to offer advice and guidance, you shouldn’t base your decision-making solely on what they think is right. In the end, you have to do some research and make sure your decisions reflect your values and goals. Taking a completely hands-off approach and handing over control of your money to someone else, even if it’s a trusted professional, is potentially a recipe for disaster.
An inheritance is a blessing in many ways, especially if it allows you to reach a level of financial freedom that you weren’t able to before. Acting responsibly and not giving in to your impulses is the best way to make sure the money lasts.
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