A large inheritance can create the temptation to spend and lend on a large scale. How do you balance your wants and needs (and those of others close to you) while keeping your newly obtained wealth intact?
Dear New Frugal You,
My father-in-law recently passed away and he left us an inheritance. We’ve always lived paycheck to paycheck. My wife is afraid we’ll blow the inheritance. Can you help us make the most of this instant wealth? — Nigel
You’re right. Whether it’s an inheritance or lottery winnings, many people do blow instant wealth. But that doesn’t have to happen. There are a number of steps you can take to protect your inheritance.
Begin by keeping your newfound wealth a secret. It’ll be tempting to share the good news with friends and co-workers. Don’t do it. As soon as you tell them about the inheritance, they will begin to see you in a different way. They will expect you to pick up the lunch tab or make a friendly “loan.”
Make preparations before you take possession of the inheritance. Know where you’ll deposit the money. Have a plan for handling investments and taxes. Know how you’ll keep track of the money.
Get professional counsel. Talk with a financial planner and a lawyer before you even have the inheritance. You’ll probably want to consult with a banker and a CPA, too. If you’re not used to handling money it’s easy to make mistakes. Let these professionals help you avoid them.
Manage your taxes. Your father-in-law’s estate paid any taxes due before you received your inheritance. But once the money is in your possession, it can easily create taxable events. Get competent tax advice before you make any decisions. Don’t send more money to Washington than you need to.
Look at your inheritance as a long-term asset. Treat it as if you expect to pass it along to your children many years from now. How you view the money will make a big difference in what you do with it. Part of protecting the inheritance principal is not spending it. Spend the income it generates, but keep the original nest egg intact.
That may mean that you won’t get to buy the impressive house or boat. Unless the inheritance is really significant, its income won’t allow for extravagant purchases. It will be tempting to give in, but if you do, remember that the money will disappear fairly quickly.
Avoid the temptation to spend money just because you can. You’re probably used to watching your spending and — except for small items — planning your purchases. Keep doing that. If you get into the habit of spending “just because,” you’ll find it difficult to break. The things you buy won’t be important to you.
Don’t try to live up to a new lifestyle. Even if the inheritance is big, you don’t have to live like the rich and famous. If you begin trying to impress others with your spending, you’ll find that they’re not easily impressed and you could soon run out of money.
There will also be the temptation to be generous with your newfound wealth. While the inclination is good, be very cautious. Some nonprofit organizations do a better job of serving insiders than they do helping beneficiaries. Check out any charity before you make a donation. Find out how much of each dollar goes to fundraising and how much to the needy.
Be careful, too, with relatives and friends looking for money. Whether they want your help with the rent or to open up a restaurant, expect requests for cash. Many of their needs will be legitimate. You will want to help, but no inheritance is big enough to meet everyone’s needs. Don’t let yourself be guilted into trying.
You’ll also be presented with many “great business opportunities.” Most are a good way to lose big chunks of your inheritance quickly. Refer them all to your investment adviser. Let him separate the good from the bad. If the idea is bad, you can tell your friend that the adviser won’t let you invest. You’ll keep your money and perhaps your friendship, too.
Don’t make snap financial decisions. You’ll make more bad choices than good ones. Very few decisions need to be made right now. Most opportunities can survive the delay of a few days, but most scams cannot.
Don’t lose sight of who you are. Sudden wealth may change how you act, but it doesn’t change who you are. You’re no smarter than you were before, nor are you any better looking.
Your newfound wealth doesn’t make you an expert in money, investing or fancy houses. Only study and experience can do that. Don’t let your ego or the flattery of others lead you astray. The results can be expensive.
Nigel, you’re wise to want to handle any sudden wealth carefully. It can provide financial aid for years or disappear without a trace depending on how you manage it.