I already know what you're thinking, “I WISH I had a large inheritance coming my way, but what are the odds? Slim to none.” I know it can feel this way, but earning an inheritance is actually not all that uncommon. Sure, it might not be millions of dollars, but if your parents own a house outright and have some savings, then you might just have $20,000+ heading your way someday (after you split it up with your siblings of course), and that's nothing to sneeze at!
So what are the actual odds of receiving an inheritance today? About 30%. But, based on a recent poll of 60+ year-olds, almost 2/3 of them expect to leave their children an inheritance. So as I said before, there certainly is a chance that you will be receiving a fairly large inheritance in your future.
What Should You Do If You Get a Large Inheritance?
For many of us, it's tough enough to get all the bills paid by the time the month is over. When it comes down to putting money into the bank for savings, there really isn't much left to speak of. Over the course of a few months or even years, we might not even see a comma enter our checking account. For those of us that feel this pain, managing money just isn't something that we're all that used to. So what happens when you receive that large inheritance? What do you do with it? Many of us want to puff out our chest and act like we have all the answers, but if we are actually real with ourselves, many of us have absolutely no idea. For the great majority that do not know what to do with a large inheritance, here is some help.
When people realize how much money they're going to get, they start making a plan for it immediately. They figure that they should quickly buy a house, get a new car, and maybe even splurge a little on a vacation home. If you know that a large inheritance is coming your way, do me a favor: slow down.
The absolute best thing you can do when you step into a pile of money is to put it into a safe account like a Certificate of Deposit and just let it sit there for a year. That's right, I just said a year. You might think this is totally unsophisticated and a waste of money, but it will keep you from buying stupid stuff that will only make you miserable in the long run.
So far in life, you have likely learned how to acquire debt and make payments. You don't need a whole lot of money knowledge to succeed at this. But, if you suddenly have $100,000 (instead of your regular $0), don't you think that it might be a good idea to learn a little something about money?
If you have no formal education in Finance, start simple with books like “The Richest Man in Babylon” and “Rich Dad Poor Dad”. From there, take a look at “Cash Flow Quadrant” and “The Millionaire Next Door”. Under no circumstances should you just blow off this education and fend for yourself. After all, your current knowledge has gotten you what you have so far, and if that is basically nothing, then that's what you'll be left with in a few years if you don't give yourself a crash course in personal finance and investing.
Make Investments That You Understand
Some people just have a way of sniffing out those that have money and don't really know what to do with it. Almost every day I hear about somebody new that inherited fortune and lost it because their trusted their friend with their money. Either that or they invested all of their money in a flashy business that vanished in just a couple months (along with their inheritance of course).
If there's an investment out there that promises to make you 20% or more per year, but you don't understand it, then don't give them a penny. Maybe the only investment that you can get your head around is a high-yield savings account and a few mutual funds. That is completely okay! At least with these choices you can almost guarantee that you will earn a return on your money. The more you understand about an investment and believe in it, the less risky it probably is.
Don't Give In To Beggars
One of the most common reasons people go broke after gaining a large inheritance or winning the lottery is that they are giving away too much money to their no-good rotten friends and acquaintances! People really don't mean to wipe out your savings account, but for whatever reason they feel like they are entitled to a small portion of your good fortune. After all, you have so much and they have so little, so why not just give them a handout? “It's just this one time.” The truth is, if you give away money to one friend, then another friend will feel entitled as well. These ‘friends' will just keep coming out of the woodwork and unless you can control yourself, you will be right back to broke in no time.
The best thing to do if you receive a large inheritance is to keep quiet about it. The fewer people that know about your money the better. This way your friendships will not be strained and your bank account will have a better chance of staying full.
The General, Practical Steps
In general, when receiving a large inheritance, the first thing you want to do is pay down your high-interest consumer debt like credit cards, student loans, and car loans. After this, some money (about six-months' worth of expenses) should be stashed away as an emergency fund. Then, some should be invested. Beyond this, if there is enough to purchase a modest house, then this could be your next step. Be sure not to buy property that is well beyond your means (with your regular income). Remember, there is still the cost of upkeep, insurance, maintenance, and property taxes on that house. The larger the house, the more expenses you will have, and if your income is small in comparison, then this could leave you strapped for cash and severely unhappy within just a few years of buying it.
Have the courage to move slow and become financially educated. If you do this, you should be just fine.
What would you do with a large inheritance?