Young and rich. It sounds like a great combination – and it is. But “rich” is a relative term. A sum that can last one person a lifetime might last another just a few years, months or even weeks. If you’re lucky enough to inherit a large amount of money when you're young, here are six tips that will help ensure that your fortune lasts at least as long as you do – and longer.
1. Think Before You Spend
The first thing many people do when they inherit money is look for ways to spend it. Some buy new clothes, a flashy car, a European vacation, a beach house and on and on until the money runs out. Instead of rushing out to the mall or the car dealer, young heirs should spend some time evaluating their financial situation. Making this effort will give you a good view of your overall financial condition, including income, expenses, assets, debts and liabilities. (See also: Evaluating Your Personal Financial Statement.)
2. Pay Off Debts, Don’t Incur Them
After you've completed your financial review, take a look at your balance sheet. If you have debts, it may be a good idea to use your inheritance to pay them down or pay them off. This will free up your future cash flow, reduce your expenses and save you the money that would otherwise go toward paying interest on your debts. While some people argue the differences between Good Debt Vs. Bad Debt, nobody ever got into financial trouble by having no debt at all. When given the choice, conservative investors choose to eliminate debt.
3. Make Investing a Priority
Once you've taken care of your debts, it’s time to invest. Acting on the "pay yourself first" principle, you can put your newfound wealth to work. By investing your inheritance you give it an opportunity to grow. (See also: Why should I pay myself first?)
4. Splurge Thoughtfully
Now that your debts are covered and your assets invested, it’s time to have a little fun. If your investments are producing a steady stream of income, or you’ve truly hit the jackpot and inherited a pool of money so large that you are debt free and have plenty of money leftover each month after paying your bills, you can splurge on that new car or place at the beach. But don’t overdo it. Just because you can buy a dozen samurai swords or a garage full of exotic sports cars doesn't mean that you should. Reason and moderation are the hallmarks of wise investors.
Another thing to think about: if your career was chosen for its salary, inheriting a lot of money could give you the freedom to do something else you've dreamed of – including paying for the education needed to become, say, a college professor instead of a portfolio manager.
5. Leave Something for Your Heirs – or Charity
Your inheritance is a blessing that, if well managed, can make a lasting positive impact on your life. If you can, continue the legacy by making plans to bequeath a nice inheritance to your heirs or favorite charities. To make sure you do justice not only to what you have received but to the generations that will follow, keep in mind that, in terms of longevity, inherited wealth has a bad track record. Some 70% of that wealth is lost by the second generation and 90% is gone by the third generation. If you’re lucky enough to inherit a nest egg that somebody else worked hard to build, you can honor your benefactor and delight your heirs by being a good steward of what you have received. No matter how large or how small your inheritance, manage it with care and pay it forward.
6. Don't Rush to Switch Financial Advisors
Research suggests that 70% to 90% of people who inherit significant wealth immediately fire the financial advisor who worked for their parents. But losses can soon follow.
The advisor you inherited along with the money either helped your parents get rich or at the very least helped them stay that way. When heirs talk to new advisors they are almost always encouraged to make a change. The usual result? The disappearance of the inheritance. These facts suggest that young heirs should think carefully before discarding the advice and wisdom that helped their parents amass a fortune.
Time will pass and eventually you will need a new advisor, but take your time finding one.
The Bottom Line
Some of the richest families in the world have had their vast fortunes squandered by future generations. Benefactors and heirs of lesser fortunes would do well to learn from their mistakes and those of other families with similar stories. A little planning, care and common sense can go a long way toward taking care of not only the second generation but perhaps the third, fourth and fifth generations as well.