Remember that family reunion you wanted to forget? You barely got through it by trading jokes with your great uncle over servings of marshmallow salad. Well, it turns out it was a day to remember for him. In fact, he left you money in his will, and today, a surprise inheritance check arrived.
Your first reaction is probably to jump for joy, but what you do next matters a lot. Many people daydream of a windfall as the answer to all their financial problems. However, approximately 70 percent of people who suddenly acquire large amounts money no longer have it a few short years later. Indeed, inheritance can be a turning point, but it depends on how you handle the money from the start.
#1: DO TAKE A DEEP, LONG BREATH (LIKE 30-DAYS LONG)
It’s common to worry about money, especially if you’re a day-to-day decision maker around finances. Yet, in the event of an unexpected inheritance, the most important thing you can do is hold off on making new purchases. Behavioral psychologist, Dr. Daniel Crosby, notes that when people suddenly acquire money, they tend to spend it quickly. In contrast, we spend our hard-earned cash in slower, more level-headed ways. Give yourself at least 30 days to get used to the idea of your inheritance — without spending any of it.
#2: DO MAKE A LIST OF IDEAS FOR HOW TO SPEND THE MONEY
You may feel an impulse to buy things. Maybe even a lot of things. But rather than spend any of your inheritance in the first month, channel that impulse through pen and paper. (Or thumbs and phone.) Make a list of all the things you’d like to do with the money, whether it’s an extravagant vacation or adding to your family’s emergency fund. Review this list a few times over the month, and it will help you clarify what you really want.
Also, suppose you inherited $50,000. It’s easy to come up with a list of what you could do tomorrow with $50,000, right? Now let’s look at the sum another way: what would you do with $5,000 over ten years? Write down your ideas for this approach as well.
#3: DO WORK WITH A FINANCIAL PROFESSIONAL
While it’s beneficial to enlist a financial professional’s guidance at any income level, it’s particularly helpful after a cash infusion. A professional can help you create a long-term strategy tailored to your unique financial goals. She will work with you to determine how much money should be saved for a financial cushion, or go toward debt, or finance a dream like starting a business.
#4: DO HONOR THE GIVER’S LEGACY
One of the best ways to feel good about how you spend an inheritance is to honor the legacy of the person who gifted it. Did your great uncle value education? If so, he’d be pleased to see his gift go toward your student loan payments or your child’s education. Did he love skiing in the Alps? Maybe it’s time to plan a trip to experience what he cherished.
#5: DON’T UNDERESTIMATE THE PSYCHOLOGICAL IMPACT OF SUDDEN INHERITANCE
Another reason why it’s so important to take a time-out from major expenses after an inheritance is because money is emotional. We like to think we’re rational beings around money, but when it comes to us unexpectedly, we can get swept up. This often leads to impulsive purchases. Take this opportunity to really look at your behaviors with money. Then the inheritance can be used in productive, new ways, rather than fueling old behaviors that caused financial worry.
At first glance, the thought of receiving an unexpected inheritance from a distant relative who lived a full life sounds all good. And, it’s true, another person’s generosity can be a beneficial event in your financial life. But remember there will be an emotional side to the windfall. Take the time to absorb the impact of your newfound money. Don’t spend impulsively — make a plan for how you’d like to spend it over time. A financial professional can help you develop a strategy to use your inheritance wisely and honor the person who offered the gift.
1 Financial Psychology and Lifechanging Events, National Endowment for Financial Education
2020-91866 Exp. 1/2022