We are on the eve of the greatest transfer of wealth in history. That’s because most Baby Boomers have reached their golden years. This phenomenon is heavily influencing our workforce and healthcare systems and is causing ripple effects that touch virtually every corner of our economy. Perhaps most notably is that an unprecedented amount of money will be passed down to younger generations over the coming years.
Families receiving an inheritance need to plan carefully in order to avoid some of the common pitfalls associated with sudden wealth. Here are some important tips to keep in mind:
Ask God to guide you and keep you centered. As Christians, we can always start by talking to God. You can express gratitude, ask for guidance, and invite the Spirit to guide you in how you might best steward these newfound resources.
Park the Money
Park the cash in a high-yielding savings account. Oftentimes when an inheritance is received, it is because of the recent loss of a loved one and you may be going through the grieving process. If this is the case, it’s best not to make any major financial decisions until you have recovered. Until you are in a healthy place to make these decisions, put the inheritance in a high-yield savings account that is FDIC insured; something that will earn some interest yet is fully liquid. Putting it in your everyday checking account will too easily tempt higher spending and is unlikely to earn as much interest.
Learn about and resolve any tax obligations. How inheritances are taxed vary by state, type of account, and estate size. It is important that you understand the tax implications of receiving the inheritance before spending any of it. A financial planner or CPA can help you navigate this in the most efficient way possible.
Remember that each dollar you inherited is worth the same as every other dollar you’ve earned. Unfortunately, statistics show that inherited money gets spent substantially faster and more recklessly. It’s easy to spend a windfall quickly. Avoid impulsive purchases. Have a thoughtful plan for each dollar before you spend it. If you inherit $20,000 and use it to buy a boat, you’ve now increased your expenses as you’ll need to maintain it, store it, fuel it, insure it, etc. This can create financial hardship down the road.
Stay the Course
Don’t change your priorities. If you tithe 10%, then don’t stop now. If you have a goal to become debt free, then let this accelerate your plan! Do not allow this windfall to change your fiscal habits. You’ll otherwise leave yourself in a bad spot once the inheritance runs out.
Set your priorities. If you don’t know your priorities, then there isn’t a better time to start listing them out than right now! A financial planner can help you establish priorities and set financial goals that are right for you. Generally, consider an order such as follows:
Satisfy high-interest debt like credit cards and perhaps student loans.
Shore up your emergency fund – set aside about 6 months of living expenses.
Increase your contributions to retirement accounts.
Pay off other debt – mortgages, secondary mortgages, car loans, etc.
Consider refinancing your primary mortgage – a shorter payback period can mean a better rate and building equity more rapidly.
Establish or update your estate plan. Do you have a will or estate plan established? If you’ve been putting it off, now is an excellent time to start as your financial situation has just changed. If you have one established already, this is a good reason to revisit your plan and update it if needed.
Too many beneficiaries of an inheritance fall into temptation or otherwise mismanage their newfound wealth. Too often this leaves them with an inflated lifestyle and without the financial wherewithal to sustain it. Don’t fall into this. Go slowly, keep your priorities in check, and have a plan. At Guide Financial Planning, we can help you navigate these uncharted waters considering everything from both a tax standpoint and developing and implementing the right plan for you. Schedule a free introductory call to learn more.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.