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- Studies indicate that typically an individual exhausts their inheritance within approximately five years, unless it is managed wisely.
- The most unwise actions regarding an inheritance include spending it on properties you cannot upkeep, letting it idle, or placing everything into a single investment.
- The most sensible action you can take is to talk to someone. financial planner , ideally before inheriting the funds.
It’s simple to think that getting a substantial amount of money, such as an inheritance, will permanently alter your financial standing. However, the truth is that this outcome hinges on how you choose to use those funds.
According to Shala L. Walker, CFP, typically an inheritance vanishes within five years after receipt, unless it is directed towards investment in financial instruments or home equity.
Walker understands just how quickly and easily money can vanish. She has dealt with beneficiaries who were handed sums large enough to transform their lives entirely but ended up squandering it all, later seeking her guidance once it was too late.
She revealed five of the biggest mistakes you could make when inheriting money.
1. Holding onto the money for an extended period
If you hold onto your money, you might encounter three significant risks: The first one is that inflation You might fall behind; secondly, you could lose potential earnings from wise investments; and lastly, having idle cash makes you more likely to spend it.
"Actually, I’ve noticed that individuals often hold onto their money for extended periods; they're scared to invest it and feel uncertain about what actions to take, so they end up doing nothing at all," stated Walker.
Walker suggests consulting a financial advisor promptly to get assistance in determining how best to manage your money, which may include putting it into investments. diversified portfolio .
2. Purchasing an asset that you cannot upkeep
A significant error made by inheritors when dealing with substantial amounts of money is purchasing assets they cannot sustain over time, like a lavish house.
"The top problem is overspending," stated Walker. She has observed beneficiaries buying houses beyond their budget, sometimes using their entire inheritance for the acquisition, which often leads to unmanageable property tax bills or residences that become costly to decorate and upkeep.
3. Keeping an inherited property that you're unable to manage financially
Inheritance isn’t always monetary; sometimes it involves properties. According to Walker, such inheritances can be particularly challenging as beneficiaries frequently develop sentimental connections to assets they may not be able to sustain financially.
"In theory, this boosted their overall wealth, yet they had to rely on their readily available funds just to keep up with the expenses of the new home. Thus, financially speaking, they found themselves asset-rich but cash-poor," explained Walker.
She suggests thoroughly reviewing the terms and conditions of an inherited asset. This encompasses checking for current leases, outstanding debts, ongoing contracts, as well as considering the potential effort and inconvenience involved in managing or maintaining the property or asset.
Walker has observed people holding onto inherited properties despite lacking the necessary income or cash flow due to emotional attachment. Often, they resort to using their savings and retirement funds to cover expenses instead.
Her primary suggestion: Do not think you have to keep the asset.
4. Investing all your funds in a single location
Usually, it’s unwise to invest all your funds in just one area, like an individual share of stock or a specific real estate asset.
"If you're constructing a fresh investment portfolio, ensure it includes diversification even when contemplating real estate. Distribute your investments to minimize risk," stated Walker.
5. Choosing not to consult with a financial advisor
If you've received money or some type of asset through inheritance, consulting with a financial planner will assist you in optimizing your inheritance to ensure you don’t end up losing everything or find yourself in an even more precarious financial position than before.
A financial advisor can assist you in constructing a varied investment portfolio that encompasses real estate or significant acquisitions, ensuring you possess sufficient funds to maintain these assets over an extended period.
Finding a financial advisor It doesn’t have to be complicated. Utilize SmartAsset’s free resource to connect with up to three fee-only financial advisors in your vicinity within moments. These advisors have undergone scrutiny from SmartAdvisor and adhere to a fiduciary standard, ensuring they prioritize your interests. Start your search now.
The initial publication of this article took place in January 2021.
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