Making Wise and Fulfilling Financial Decisions After an Inheritance
by Amy Sterling Casil
October 16, 2019 .3 min read
Have you heard about that about $6 trillion will be passed on to the next generation as inheritance over the next 30 years? Most news reports about "the Great Wealth Transfer" focus on billionaires and their heirs.
But what about non-billionaires? According to financial planners, 70 to 90 percent of people who inherit more than a few thousand dollars spend it within two to ten years.
There are a few reasons why people can go through an inheritance quickly. The good news is, most of the reasons are things you can easily change.
The most important change you can make is changing your attitude about inherited money before you even get it. Richard Thaler, a Nobel Prize-winning economist, coined the term "mental accounting." According to Thaler, people make different financial decisions depending on where the money came from. Thaler recommends that people should value money the same way and treat it the same regardless of where it came from.
Think about your tax refund. Did you consider the money you got back on your taxes the same way as your paycheck? Most people treat tax refunds like "found money" and spend it on anything they like.
Although you probably don't know how much of an inheritance you'll receive, you can overcome the "mental accounting" barrier to using the inheritance wisely by planning now.
When it comes to windfalls and inheritances, women can have a few concerns that men don't. First, you're likely to live longer, which means your retirement money needs to stretch farther. Only 35 percent of women surveyed by RBC's U.S. wealth management division felt "confident" about their ability to manage their money. Only 29 percent of the women RBC surveyed said they'd had any financial guidance or advice.
Does this mean that you need to put your inheritance in the bank and forget about it?
No way! But you may have a better experience if you do put your inheritance in a 6-month CD while you get as much information as you can and set up long-term plans.
Whichever way you go with your inheritance, consult a financial advisor to help you plan how you'll invest, save, and use the money.
Here are some things you can consider doing with an inheritance:
Set up an emergency fund. An emergency fund isn't savings for a house or a car. Usually it represents three to six months of your regular income. You can tap into these emergency funds in case of emergency: car repairs, being laid off, or unexpected medical bills.
Pay off debts -- especially high interest credit cards. There really are people out there who have high interest credit cards with substantial unpaid balances, who also have savings accounts paying 1.8 percent interest. Every month those people fail to pay off the costly balance on the card and keep money sitting in the bank, they are spending money they don't need to and enriching somebody other than themselves.
Set aside a portion of the funds to do things you've always wanted to do. You can decide how much you can use as a discretionary fund for travel, education, or home improvements. The amount you spend will depend on your long-term plans for the money.
Because I received a modest inheritance, I was able to pay cash for my cars. I never bought a brand-new car and I didn't have to finance a high-interest car loan. I got used cars in good condition. I currently drive a 2006 Jeep Wrangler Rubicon. Old car, right? Why don't I buy a new one? This is the last of the inline-6 engine Jeeps and it's now worth more than I paid for it despite the crazy roads its been on.
It's hard to be logical when money and family are involved. We can feel guilty because our parents sacrificed a lot during their lifetime so we could have the money after they're gone. Other times, we can be so used to doing without that we get overwhelmed by the pressure and excitement of getting a lot of money.
So, sit down with a trusted adviser or two and read more than a couple of articles about how to handle an inheritance or windfall of different sizes. That way you'll be much happier with your choices in the long run. You can handle an inheritance wisely and be happy with your choices.
Amy Sterling Casil
Amy Casil is a single mom, college teacher, business planner and affordable housing executive who lives in Southern California. She loves outdoor living and animals and is passionate about helping women to avoid her financial mistakes and learn from her successes.