Step by Step: How to Handle Inheritance Money or Other Financial Windfall
Many individuals can share a story or two about someone they knew who received a large sum of money, such as an inheritance, and within a year or two had spent it all. I can’t imagine how it must feel when there is a zero- account balance, and nothing to really show for it. Of course, some might argue that buying a house or a car is having something, but how long can you afford that home without adequate cash flow?
A large sum of sudden money—called a financial windfall—can make you feel invincible and powerful. So how do you take a step back and make sure that you are not making decisions that you may regret later? Follow this advice to invest and budget this money wisely.
Do take a breath – Keep the majority of the money where you can’t touch it until you have a plan in place. Whether you were or were not expecting to receive this money, you can usually benefit from taking a step back. If you need to, take out a piece of paper and write out all of your thoughts. This may mean taking a few days away where you can think without any interruptions. Identify a goal or where you hope to be in 5, 10 and 20 years from now. This can provide clarity and purpose and can be the basis of any future financial decisions you make.
Do seek professional help – Not only from a financial advisor, but also from a qualified counselor as well. Otherwise, you may make decisions solely to fill a desire or emotional need. If it was a loved one that passed, the grief from the loss can cloud your judgment very fast. A good therapist can help you develop coping mechanisms and strategies for handling all kinds of stressors.
Do set aside some “crazy money” – You have inherited—or have received in some other way—money outside of the norm, and it may feel good to be able to blow it on something silly. This amount should be enough to make you feel like you had some fun, but not enough to jeopardize your financial future. Make this part of your thought gathering and reflection process. It might also be wise to keep the exact dollar amount you have received to yourself, so others don’t target you for loans or gifts.
Do park it somewhere safe – A money market account can be used for the short-term until you have a plan in place for your money. Consider not using your new-found wealth to invest in a friend’s business or other speculative venture until you have a complete financial plan in place. When choosing a provider for your account, ask about maintenance fees, FDIC insurance limits, and if there are any other fees you need to be concerned about.
Do consider your debt – Ideally, you should have a handle on your overall debt situation. If not, take the time to list out who you owe and how much. Also include any interest you are paying on the debt. This information will be important to have when you meet with your financial team. Don’t make a hasty decision on paying off debt until you understand your cash flow situation.
Do not stop educating yourself – Ask a lot of questions. You should be asking every professional you talk to about fees, any risks involved, and about their experience and background. Do some research and get a general sense of how much you should be paying for advice and what you should expect. A trustworthy team is invaluable, but one that is not looking out for your best interest can certainly change your life’s course.
Do not cash out inherited investments without understanding options – One example of this is inheriting an IRA from a family member. Knowing how to ‘stretch’ it out over your lifetime can allow you to take advantage of this tax deferral vehicle for years to come. The same holds true for other tax-advantaged investments. Also, selling out of other investments that may have a low cost basis could result in your unnecessarily paying more in taxes than is needed. Be sure to consult your team of advisors before making any moves with your money.
Do not neglect to develop a team of advisors – Consider a trustworthy team that includes a CPA, attorney, and financial advisor. Ask friends and family for recommendations and interview at least three people in each field. It is important that you not only have a solid rapport, but the experience and knowledge that are needed at this time. Ask questions and do research. If you feel like you are not being listened to or being talked down to—move on.
Do not be afraid to set financial boundaries with friends and family – Develop a script that you can either write down or go over in your head. Practice it until you feel comfortable with what you want to say. People often respect a direct response rather than an ambiguous answer.
You can say something along the lines of, “I want to keep our close relationship, but I also want to establish some boundaries when it comes to money. So please don’t ask for me to pay your bills or loan you money. I hope you understand that I’m not trying to hurt your feelings or offend you. But I need to tell you this for my own financial peace of mind.”
It may not be appropriate to say this to anyone without a prompt from them first. Assuming and jumping to the conclusion that they’re going to ask you for money might hurt your relationship even more. Perhaps they’ll ask or make a hint, and then you’ll know that you should kindly place those boundaries.
Do not avoid comprehensive planning – If you feel like the entire process is too much to handle all at once, break it down in baby steps. For example, take a day to call three professionals to set up appointments. A few days later, put the documents you will need for your appointments together in an electronic or paper folder. Continue until you have gathered the information and advice you need and have a plan in place that covers your short, medium, and long-term financial goals.
Summary- A windfall can be the start to securing your financial future, if it is handled with the care that it deserves. Don’t only focus on addressing the practical issues of receiving a large sum of money, but take the time to understand your emotional responses, and how they can either clarify or cloud your decision-making.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.