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.
Think Before You Spend
The first thing many people do when they inherit money is to 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.
The best way to evaluate your financial situation is to hire a financial advisor who can objectively help you manage your wealth. Although it can seem like a hit to your pride to hire someone to tell you what to do with your money, these people are certified experts at not only helping you make money, but keeping you from losing it as well.
- Young adults who receive large inheritances should hire a financial advisor first thing. If your parents had one, they are usually a better option because they already understand the situation. You may even know them personally.
- The absolute worst thing someone can do is to go out and spend money lavishly. Get your affairs in order first, and then squander only what you can afford to live without.
- Investing can seem intimidating, which makes it wise to hire an investment advisor to guide you to a secure financial future.
- Eliminating existing debts is often the first and best move you can make.
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.
Think of debt like a reverse return: a 15% return on a stock is great, but a 15% interest rate on debt paid yearly is a terrible investment.
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.
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.
Your financial advisor will be able to help you invest wisely. The best thing to do for most people—they will probably echo this sentiment—is to invest widely in a large basket of funds that offer a solid return over time. It is considered safe, and often the smartest investment for young people with an inheritance.
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 left over each month after paying your bills, you can splurge on that new car or place at the beach. Like with any other decision, discuss first with your financial advisor.
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.
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.
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.
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.