Hi Ruth,
I recently received a significant inheritance, and while I’m grateful for this, I’m feeling a bit overwhelmed about how to manage the unexpected windfall. I’ve never had this much money at once, and I’m afraid of making the wrong decisions or spending it all too quickly. I want to be responsible and use it wisely, but I’m unsure where to start. Should I invest it, pay off debts, or save it for the future? What steps should I take to ensure I make the most of this opportunity without rushing into any decisions?
We each get a few lucky breaks in our lives. Receiving an inheritance is one of them. While I’m sorry to hear that you have lost someone who cared about you enough to leave you some money, I’m pleased that you have the good sense to appreciate that receiving a windfall is a rare opportunity that needs to be handled well.
An unexpected financial windfall can change the entire direction of your life. Make your next moves count.
If the money has already been deposited in your bank, open a high-interest, no-fee bank account and move the entire sum over there. Give it a name that reflects the person who left it to you. You will remember the person you lost each time you see it. And it will challenge you to make decisions that they would smile at.
We often put emotion into inherited money, thinking that this money is unique and, therefore, needs to be managed uniquely. I don’t feel quite that way. While the person who left it to me might be on my mind, I think of the money they gave me as general income. Much like my regular income, I still want to manage it well, but it doesn’t have emotion tied to it.
You say you want to make the most of the opportunity, which I agree with. But I’d encourage you to take your time to decide what the best course of action is. Don’t rush to spend or have your newfound wealth “make money” for you. Remember that you have already significantly increased your original net worth just by receiving this money. Give yourself up to a year to decide on a course of action. Now, the pressure to “do something” has gone.
Those who have already created a robust financial framework more easily adjust to receiving an inheritance. They just apply the windfall to the part of the process they are at. Those with less structure and few or no long-term goals can feel overwhelmed by decisions that must be made. They need to do a crash course in managing their money to get up to speed with managing this windfall.
I’ve created a Financial Independence Series that works through the steps required to feel financially confident. They are:
1. Knowing your net worth
2. Budgeting
3. Creating an emergency fund
4. Contributing to your retirement account
5. Becoming debt-free
6. Investing
If you are reading this and have an inkling that an inheritance might come your way one day, take note. The work you put into your finances today will make dealing with any inheritance far easier.
Once you have worked out your financial position, I suggest you allocate your inherited money to the stage of the process you are at. Treating yourself to a celebratory dinner in remembrance of your generous benefactor is okay, but I wouldn’t encourage you to think of this as spending money.
Instead, develop the mindset that you will build upon what they have given you so that in years to come, you have grown your wealth, not diminished it. How good did it feel to be entrusted with this windfall? And how good would it feel to know that you can gift the next generation upon your death, too?
Only once you know your financial position and are tracking your net worth monthly can you begin deploying your windfall to your finances. By now, you will be budgeting so that you might use some money towards short and medium-term goals you have been saving for. Once you know your monthly expenses, you can use some of this money to set aside three to six months of expenses into an emergency fund. If you have been undersaving in your retirement accounts, you can begin to make higher payments. If you have debts, particularly consumer debt, you can now pay them all off. If there is money left over, you can either put a deposit on a home if you want one, pay your mortgage off if you already own one or invest in assets that will increase in value over time, giving you future income.
If you spend the money, it is gone, and you will end up right back where you started. If you invest the money, it will continue to benefit you. Therefore, seek information about building your financial systems to a point where this windfall will simply spring you into a future you were already aiming for.
When the dust settles and all of your money has been allocated, I want you to feel calm that the inheritance has been utilised in a way that the person who left it to you would be proud of.
Given your confusion and sense of overwhelm, spend some time thinking about what you will do with your money once you die. How can you better prepare the recipients of your will than you have been? I encourage you to speak with the future recipients about your wishes, and you may find an opportunity to help them learn about personal finance so they can feel confident financially long before any windfall comes their way.
I encourage you to slow down, take your time and seek the wisdom and advice of those who have nothing to gain from your decisions, such as friends and financial professionals. Create a plan and trust in your decision-making. Mull it over, and finally, start moving the inherited money where it needs to go. Because you are concerned enough to ask a few questions, you will reflect on this period and realise you did the right thing.
Got a burning money question for Ruth? Send them through to [email protected]!
Ruth blogs at thehappysaver.com all about how she and her family handle money. What’s the secret? Spend less than you earn, invest the difference, avoid debt and budget each dollar that flows through your hands. She firmly believes that if you can just get the basics right, life becomes easier from there on in.
