Inheriting a large sum of money usually comes hand in hand with the grief and sadness of losing someone close to you. On the other hand, there is the benefit that the inheritance could change the way that you live the rest of your life. Many people who have not had experience and education with making decisions about large amounts of money, may be fearful and intimidated about the wide range of financial decisions and choices that are now presented to them. Some people may act rashly, making a series of fast and short-sighted expenditures until the money is gone.
Stop and Think. Perhaps the most important step is to pause, and do nothing. This can be an emotional time, so it may be difficult to know how best to deal with your sudden wealth. It's best to wait a few months in most cases, before making any major decisions. Make sure that you have given ample thought to what is important to you and what your financial priorities are, to avoid making any missteps with the money. Chances are that you won't be getting a second chance with another sizable inheritance.
Pay off High-Interest Debt and Make Room for an Emergency Fund. You should be clearing all of your current debts, credit cards, high-interest lines of credit and mortgages. Use the inheritance to buy yourself some peace of mind by setting aside an emergency fund equivalent to about six months' income.
Plan a Budget. You need to set out a budget and a new spending plan. Now you may be able to do some of those things you could never afford to do before. Go slowly here, we need to make sure that this money lasts and will be able to make a difference for your whole life and hopefully that of your family as well. Set yourself some limits, and if you know that you're not very disciplined or experienced with financial planning, do yourself the biggest favour by finding a financial professional now to help advise you on smart choices.
The choices are endless - you may be tempted to buy a bigger home, a cottage, or a vacation property. You want to put money aside for your children's or grandchildren's university educations. You will want to ensure that your Registered Retirement Savings Plan and Tax Free Savings Account contributions are maximized as the first step towards creating a retirement plan. You might even want to start a new business, and start to create a balanced investment portfolio in order to grow your wealth over the long-term.
Hire an Expert. Ask your friends and family for referrals to investment advisors that they know and trust. Make sure you educate yourself about the options before you decide how to spend your money. A conservative investment advisor with financial planning credentials and a tax accountant are invaluable sources of information and advice. If you know that you're going to inherit, you can begin planning ahead of time, but if the inheritance comes as a surprise, a professional can provide a better idea of your options. With large inheritances, you will likely be bombarded by people wanting to sell you investment and insurance products. There's nothing wrong with that, but just make time to get an objective opinion that is based on your entire financial picture and a thorough understanding of your goals.
Your investment advisor will work with you in creating a personal financial plan, which acts as your roadmap., It will show you whether your spending patterns and investment growth rates are going to last your whole life and be enough for you to achieve your financial goals. Complicated assets, such as a family business or an asset you've inherited with others such as a home, will probably require advice from a professional to help clarify the options. Though a master plan will help you grow the assets you've inherited it should continue to change over time.
Create a Conservative Investment Portfolio. Constructing a good quality investment portfolio that generates passive income is the slow-and-steady approach that will lead to you to financial independence. Working with your advisor to convert your inheritance into an investment portfolio that produces a steady stream of income is not as sexy as finding the next big investment, but it can be a safer long-term strategy. To achieve stability and income growth, you'll need to mix stocks and fixed-income investments, but don't speculate by sinking it all into volatile equities. Let's consider it a 'get rich slow' plan that works, instead of taking unnecessary risks and possibly jeopardize your new-found wealth.
Think Long-Term. On the other hand, depending on your age when you inherit, you want to position your inheritance more towards long-term growth, in order to get you to your financial goals in 20 years. The point is to make the money work for you without taking unnecessary risk.
Sometimes people who have inherited money consider it an opportunity to do away with their life insurance premiums. This may be shortsighted as tax planning is a concern for people with significant wealth, and insurance is a great offset for taxes owed at death. If your insurance needs analysis shows you have enough capital to pay off all your debts, provide for your children's education, pay your final taxes, and provide enough income to support your family comfortably, then you may not need insurance. But if you're thinking about investing the money in a business which runs the risk that the money may not be there if you die prematurely, you should keep, and may even need to upgrade, the amount of your insurance. Insurance can also be a powerful investment vehicle for passing money on to later generations in a tax-free way. After all, if you have the choice whether the government or your family should receive the tax on your final estate, which would you choose?
Plan for Future Generations. If you plan to pass on an inheritance to your own children, you'll need to do some estate planning: a new will, powers of attorney (if you haven't got them yet), and perhaps setting up a trust to carry out your wishes. You will want to ensure that your family begins their own financial education process as well. After all, your children should be well versed with handling money and making it work for them, so they don't lose their own inheritance, which you are working so hard to preserve. The way you handle your sudden wealth will help as a model when their time comes to enjoy their inheritance.
Make sure that you're working with an advisor who is proactive, takes the time to explain and show you what progress you are making towards achieving all of your financial goals. With your growing financial education and confidence in your ability to make smart investment choices, the shape of your and your family's financial futures will become more clear to you.
If you or someone you know have recently been left an inheritance, and has questions about their financial situation & how to prioritize the decisions that lie ahead, please contact me as a resource to help you.
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