Getting an inheritance can be a financial opportunity but if you’re not careful, it can easily be wasted. It turns out, heirs often end up spending all of the money and getting accustomed to a more lavish lifestyle than they can keep up with. Figuring out what to do with an inheritance without squandering it can be tricky, but it’s important to have a plan. If you inherit money, avoid these common mistakes and consider the suggested strategies for avoiding them.
1. Spend Without Assessing
It’s important to first take an honest look at your current financial situation. Acting without knowing where you stand can lead to big trouble. Tackle any debt you have, starting with the highest-interest loans.
Once the debt is gone, then you can focus on life improvements. It’s a good idea to create a budget that lays out your current expenses, contributions to your emergency fund and retirement savings. Carefully consider every purchase you make so you do not indulge away all your cash. No matter how much money you have, it is always wise to keep track of what you are spending it on. There’s no point in getting out of debt just to get right back into it through reckless spending.
2. Ignoring Expert Advice
Even if you are usually responsible and have a pretty firm grasp on your finances, you can likely benefit from the advice of a qualified accountant, attorney and/or other financial experts once you receive an inheritance. They can offer professional advice on potential tax implications, where you should keep your money and how to avoid foolish purchases or investments.
3. Being Unrealistic
It’s a good idea to avoid lifestyle inflation — the large influx of cash may not last as long as you think. Before you make rash decisions, adjust your expectations and figure out how every purchase will affect your future. This way you will know what you can really afford and how long your inheritance will last. Even if you become an instant millionaire, there is no guarantee your funds will last long enough for a lifetime of lavish spending.
4. Giving Up Other Income Sources
Unless you had exceedingly wealthy relatives, it probably isn’t smart to leave your job just because you received an inheritance. At the very least, wait a little bit so you have time to figure out how the money can best be used to improve your life (maybe you want to use it as a down payment to buy a house or start a business). It’s important to remember that taxes will likely cut into the money you actually receive. Even if you decide leaving your job is the right thing for you, it’s a good idea to give it some thought first.
5. Paying for Friendship
Sharing with others is usually a nice gesture, but giving all your inheritance to your entourage can end up hurting you. It’s a good idea to establish boundaries with family and friends so they do not suddenly show up asking for their “fair” share. This is your money and you should decide how you want to deal with it. Help others if you want but do not be pressured into giving more than you can afford.
Getting a large lump sum of money can feel like winning the lottery (especially if the money comes when a distant, unknown relative passes away), but acting impulsively or irresponsibly can turn your luck into loss. Consider your outgoing cash flow carefully so you can reach a level of financial freedom you previously couldn’t afford. Then, it’s a good idea to take steps to make sure the money lasts.
More Money-Saving Reads: