Large financial windfalls can be surprisingly hard to handle. An amount of cash that could potentially last someone their entire life if properly managed can evaporate in a matter of months if a person makes different choices. As a result, it’s important to understand what steps can help you get the most value out of your inheritance, ensuring that, if it doesn’t last long, it provides you with the greatest possible benefit. If you aren’t sure where to begin, here’s what to do if you end up with a large sum of money.
Don’t Make Any Impulse Purchases
When you first get your inheritance, it may be so large that it’s hard to fathom how long it will last. At times, this makes a person think that they can afford a splurge initially, causing them to buy something expensive mainly on impulse.
Additionally, an inheritance usually arrives after a traumatic event, the loss of a loved one. This heightened emotional state may cloud your better judgment, causing you to make purchases that you wouldn’t under normal circumstances.
It’s important to remember that even a large amount of cash can disappear quickly if you adopt a spend-first, think-about-it-later mindset. Ideally, you want to avoid all impulse purchases when you first receive your inheritance and adopt a planning-oriented mindset. That way, if you do end up spending any of the money, you don’t do it on a whim. Instead, you give yourself a chance to understand the trade-off that happens by making the purchase, allowing you to make wiser decisions.
Consider Working With a Certified Financial Planner
If your inheritance is incredibly large, working with a certified financial planner (CFP) may be a smart move. Many people struggle to adjust to new-found wealth. As a result, they make poor financial choices and don’t make the most of the windfall.
By finding a CFP with experience in inheritance or wealth management, you can get insights from a professional who will keep your goals and best interests in mind. Essentially, you’ll have access to impartial advice from someone familiar with your options, something that can make it easier to maintain the right perspective and ultimately make better decisions about the money.
Plus, they can assist you with longer-term estate planning. If the inheritance is large enough that some may get passed on, or if you acquire assets you’d like to bequeath to someone else when you pass, this can be the best time to sort some of that out.
Plan for the Taxes
With an inheritance, there’s a good chance you’re going to have to deal with an impact on your taxes. If you aren’t prepared for that, you may find yourself in a difficult financial situation when you file, and that isn’t ideal.
At a minimum, you’ll likely need to deal with federal estate taxes. In some cases, you may have state estate taxes, depending on where you live. If you sell assets, then you might have to navigate capital gains taxes, as well. And that’s just the tip of the iceberg.
Since taxes can be complex, it’s wise to speak with a professional. If you’re working with a CFP, they can usually assist on this front, too. If not, then you may want to find a certified public accountant (CPA) or another kind of trained tax professional to help you navigate the situation.
Pay Off High-Interest Debt
High-interest debt often has a major impact on a person’s financial wellbeing. It can be a source of stress, hinders your cash flow, and may make it harder for you to take certain actions, like buying a home that would require a mortgage.
If your inheritance is sizeable, it is wise to pay off (or pay down) any debt that qualifies as high interest. Usually, this includes credit cards, personal loans, or other debts with an interest rate that is in or near double digits.
While you can certainly pay off lower interest debts, too, that may not be the best move from a purely financial perspective. If you could potentially earn more by investing the money than you save by paying off a debt, then you may want to go the investment route.
However, if paying off all of your debt gives you a substantial amount of peace of mind, then it could be the right choice for you. This is especially true if you otherwise have solid income or would still have a significant amount of your inheritance left when you’re done.
Put the Money to Work for You
As mentioned above, a large inheritance may have the ability to last a lifetime if you manage the money properly. By investing, you can put the money to work for you, allowing it to grow or serve as a source of income for far longer than it would otherwise.
When it comes to investing, you may have a lot of options. Along with brokerage accounts, you may want to put some money in a retirement account or a 529 college savings plan. Each option has its own benefits and drawbacks, so it’s wise to consider which may best align with your objectives.
Generally, you’ll want to work with a CFP or a fee-only financial advisor to determine which investments are right for you. They can help you make wiser choices, manage risk, and increase your chances of achieving your investment goals.
| Platforms: | Fees and Minimum: | Best for: |
|---|---|---|
| Robinhood | Free | Beginner investing |
| Acorns | $1 per month | Spare change investing |
| The Motley Fool | $99 for the first year. | Stock advising |
Make Thoughtful Purchases
After you’ve handled everything above, if you still have some money left, then spending some usually isn’t an issue. For some people, this may allow them to buy a home, vehicle, or other items without debt, which could be ideal. It could also make a nice vacation possible without having to turn to credit cards or loans.
Just make sure that your purchases at this stage are thoughtful. While a splurge may be okay, you also don’t want to go overboard. Really consider how you spend every dollar that heads out the door to ensure it is genuinely the right move for you.
Embrace Giving
If your needs are all met, you may want to consider giving some of your inheritance to charity. While you don’t need to give to the level where you cause yourself a hardship, donating some of the money can be very rewarding.
Consider if there is a cause you feel strongly about that would benefit from some support. Then, consider making a one-time donation or smaller donations over time, allowing you to help that charity accomplish its mission.
Depending on the size of the donations, there may be some tax-related benefits to giving, too. Make sure to track your donations properly. That way, if they do qualify you for a deduction, you can capture that when you file.
Get Comfortable with “No”
If your windfall is enormous and other people are aware of it, you may find yourself inundated with requests for money. Family members, friends, charitable organizations, and others may all ask for financial support.
While giving is certainly fine, you also need to get comfortable with saying “no.” Some of the requests may be unreasonable, while others may be outright scams. A portion of them will be purely opportunist, as the person doesn’t legitimately need help.
It’s crucial to set boundaries with your family members and friends, as well as be cautious when approached by anyone claiming to represent a charity. If you need to say “no,” be definitive, too, as hedging may make the person think they can reopen the discussion later.
Have you ever inherited a substantial sum of money? If so, how did you handle it? Do you feel you made smart choices, or do you wish you did it differently? Share your thoughts in the comments below.
Read More:
- Inherited Stocks and How to Handle Them
- 3 Simple Steps to Follow When Planning Your Estate
- Use These Tips to Pass Your House to Your Heirs Tax Free
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.
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