Imagine a fat cheque lands in your lap (thanks to your loved ones). Inheriting a large sum of money can feel like a windfall. It’s an opportunity to secure your future, fulfil your dreams, and improve your lifestyle.
But hold on to your horses because as exciting as this sounds, inheriting a large sum can turn sour faster than yesterday’s milk if you don’t handle it right.
Inheriting money can be a double-edged sword. You mess up, and your dream life might turn into a nightmare of financial woes.
Here’s the thing: most folks aren’t exactly equipped to handle a sudden influx of cash. We’ve all heard stories (or maybe seen it, in real life) of folks who blew their inheritance on fancy cars, lavish vacations, and “get rich quick” schemes. Don’t be that relative everyone whispers about at family gatherings!
Here are 9 common mistakes you should avoid to make the most out of your inheritance.
Estimated read time: 5 minutes and 06 seconds
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Buckle up. Here we go!
1. Don’t Rush to Make Big Decisions
Just lost someone close? Grief can cloud your judgment. Take a breather.
There’s no reason to rush into any decisions right away — you can let your inheritance sit until you’ve finished processing your grief, even if that takes months. What’s important is that you take care of your emotional needs first.
When you receive a significant amount of money, it’s natural to feel excited and overwhelmed. You might want to pay off debts, buy a new car, or invest in a new business. However, rushing into big financial decisions can be a huge mistake.
Take Your Time: Allow yourself some time to process the windfall. Grief and excitement can cloud your judgment, so wait a few months before making any major financial moves. This period can help you think more clearly and plan effectively.
2. Don’t Tell Anybody About Your Inheritance
While it might be tempting to share the news of your inheritance with friends and family, doing so can attract unwanted attention and pressure.
Keep it private. Sharing details about your newfound wealth can lead to numerous problems:
Unsolicited Advice and Requests: Friends, family, and acquaintances might offer unsolicited advice or ask for loans and financial support. This can put you in uncomfortable situations and strain relationships.
Increased Risk of Fraud: The more people know about your inheritance, the higher the risk of becoming a target for scams and fraudsters. Unscrupulous individuals might try to exploit your newfound wealth.
Social Pressures: Knowing you have a lot of money might lead others to expect you to spend lavishly or contribute more to social events, gifts, or charitable causes. This can create social pressure to live beyond your means.
Maintain discretion. Discuss your financial situation only with trusted advisors like your financial planner, tax consultant, or lawyer. Keeping your financial affairs private helps protect your wealth and reduces stress from external pressures.
3. Don’t Listen to Your Bank Manager or CA for Investment Advice
Bank managers might seem like trustworthy advisors because of their professional roles. However, their primary job is often to sell the bank’s financial products, which might not always align with your best interests.
Chartered Accountants (CA) are experts in tax and accounting, but they might not have the expertise to provide comprehensive investment advice. Their recommendations might be limited to tax-saving instruments, which might not be the best investment option for you.
Seek Independent Advice: Instead of relying on bank managers or CAs, consult a fee-only Registered Investment Advisor (RIA). They can offer unbiased and specialised advice.
4. Do Not Quit Your Job
One of the first things that might cross your mind after inheriting a significant amount of money is to quit your job. After all, financial freedom might seem like a good reason to leave behind the stress and routine of a regular job. However, quitting your job hastily can be a huge mistake.
Stay Grounded: Having a job provides structure, purpose, and social interaction, which are crucial for your overall well-being. A sudden departure from your job can lead to feelings of isolation and a lack of direction.
Evaluate Your Financial Situation: Even with a large inheritance, consider the long-term implications. Your job might offer benefits like health insurance, retirement savings, and other perks that are necessary for your future security.
Gradual Transition: If you decide to change your employment situation, do it gradually. Consider transitioning to part-time work, consulting, or freelance opportunities that allow you to maintain some income and engagement while giving you the flexibility to enjoy your newfound wealth.
5. Don’t Invest in Your Relative’s ULIP Policies
Family members like uncles might suggest insurance-based investment products like ULIPs or endowment plans, believing they are safe and beneficial. However, these products often have high costs and lower returns when compared to other investment options.
Avoid Mixing Insurance and Investment: Keep your insurance and investment needs separate. Invest in term insurance for protection and consider mutual funds, stocks, or bonds for investment purposes.
6. Do Not Lend or Invest in Your Friend’s Business
When friends or family hear about your inheritance, they might approach you for loans or investments in their business ventures. While it’s natural to want to help those close to you, lending or investing without due diligence can lead to financial and personal complications.
Assess the Risk: Small businesses and startups are inherently risky. The failure rate for new businesses is high, and investing in a friend’s business can jeopardise your inheritance.
Set Boundaries: Politely but firmly set boundaries when friends or family ask for financial help. Explain that you’re managing your inheritance carefully and need to prioritise your own financial security.
Explore Alternatives: If you’re determined to help, consider non-financial ways to support your friend’s business, such as offering advice, networking opportunities, or small non-refundable contributions that you can afford to lose without affecting your financial stability.
7. Do Not Start a Business Immediately
Inheriting money might spark entrepreneurial ambitions, making you eager to start your own business. While this can be a fulfilling endeavour, diving in without careful planning can be a costly mistake.
Develop a Business Plan: Take the time to create a detailed business plan. This includes market research, financial projections, and a clear understanding of the industry you want to enter. A solid plan can help mitigate risks and increase your chances of success.
Gain Experience: If you’re new to entrepreneurship, consider gaining experience first. Work in the industry you’re interested in, take relevant courses or seek mentorship from successful entrepreneurs.
Financial Buffer: Ensure that you have a financial buffer in place. Starting a business can take years to become profitable, and having additional savings can help you weather the initial challenges without depleting your inheritance.
8. Don’t Get Too Comfortable
A large inheritance can create a false sense of financial security, leading to complacency. Getting too comfortable with your financial situation can cause neglecting necessary financial planning and management.
Stay Proactive: Continue to monitor and manage your finances actively. Regularly review your investments, savings, and spending to ensure you’re on track to meet your financial goals.
Set New Goals: Use your inheritance as an opportunity to set new financial goals. Whether it’s increasing your retirement savings, funding your children’s education, or investing in a new home, having clear objectives can keep you motivated and disciplined.
Maintain Financial Discipline: Avoid excessive spending and lifestyle inflation. Just because you have more money now doesn’t mean you should abandon the financial habits that served you well in the past.
9. Don’t Keep It All in Fixed Deposits (FD) and Live Off the Interest
While fixed deposits (FDs) are low risk, they offer relatively low returns, especially after accounting for inflation. Relying solely on FDs can erode your wealth over time.
Diversify Your Portfolio: Invest in a mix of assets to balance risk and return. Consider equities, bonds, mutual funds, gold, and real estate to create a well-rounded portfolio that grows your wealth.
Final Thoughts
An inheritance might feel like a magic jackpot, but it’s real money. Don’t blow it all on a fancy car or that dream vacation (although a well-deserved break isn’t a bad idea!). Think long-term – secure your future, pay off debt, and invest wisely.
An inheritance is a chance to build a secure future. Making smart decisions and avoiding common mistakes can help you preserve and grow your wealth, ensuring that your inheritance benefits you and your loved ones for years to come.
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Still Curious?
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
Her Money – WHAT NOT TO DO IF YOU WIN OR INHERIT MONEY
Alux.com – 15 Things To Do If You Get Rich All of a Sudden
Investopedia – What to Do With a Large Inheritance
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.
