The Top 5 Mistakes You Can Make With Your Inheritance, Says a Financial Planner
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- Studies indicate that typically an individual exhausts their inheritance within approximately five years, unless it is wisely invested.
- The most unwise actions regarding an inheritance include putting money into assets you cannot upkeep, leaving it untouched, or investing everything in a single area.
- The most sensible action you can take is to talk to someone. financial planner , ideally before you have inherited the money.
It’s simple to think that getting a substantial amount of money, such as an inheritance, will permanently alter your financial standing. However, the truth is that this outcome hinges on how you choose to use those funds.
According to Shala L. Walker, CFP, typically an inheritance vanishes within five years after receipt, unless it is allocated towards investment assets or home equity.
Walker understands how quickly and effortlessly wealth can disappear. She has dealt with beneficiaries who received more than enough funds to transform their lives but ended up squandering it all, later seeking her guidance once the situation became dire.
She revealed five of the biggest mistakes you could make when inheriting money.
1. Holding onto the money for an extended period
If you hold onto your money, you might encounter three significant risks: The first one is that inflation will stay caught up; the second is that you might lose out on potential earnings from smart investments; and lastly, you're more likely to spend idle cash.
"Actually, I’ve noticed that individuals often hold onto their money for extended periods; they are hesitant about investing it and feel uncertain about what actions to take, so they end up doing nothing at all," stated Walker.
Walker suggests consulting a financial advisor promptly to get assistance in determining how to handle your money, which may include putting it into investments. diversified portfolio .
2. Purchasing an asset that you're unable to upkeep
A common error made by inheritors when dealing with substantial amounts of money is purchasing assets they cannot sustain over time, like a lavish house.
The top problem is overspending," stated Walker. She has observed successors buying houses beyond their budget, sometimes using their entire inheritance for the acquisition, which often leads to unmanageable property tax bills or residences that are costly to decorate and upkeep.
3. Keeping an inherited property that you're unable to manage financially
Inheritance isn’t always monetary; sometimes it involves properties. According to Walker, such inheritances can be particularly complicated since beneficiaries may develop sentimental connections to assets they aren't financially equipped to sustain.
"In theory, this boosted their overall wealth, yet they had to rely on their readily available funds just to keep up with the expenses of the new home. Therefore, financially speaking, they found themselves asset-rich but cash-poor," explained Walker.
She suggests thoroughly reviewing the terms and conditions of an inherited asset. This involves looking at current leases, debts outstanding, ongoing contracts, as well as the potential effort and inconvenience involved in managing or maintaining the property or asset.
Walker has observed people holding onto inherited properties despite lacking the means to sustain them financially, often due to emotional attachment. This frequently leads to draining their savings and retirement accounts to cover expenses.
Her primary suggestion: Avoid thinking you have to keep the asset.
4. Investing all your funds in a single location
Usually, it's not advisable to invest all your funds in just one asset, like a solitary stock or real estate property.
"Should you be constructing a fresh investment portfolio, ensure it includes diversification even when contemplating real estate. Distribute your investments to minimize potential risks," stated Walker.
5. Choosing not to consult with a financial advisor
If you've received money or an asset through inheritance, consulting with a financial planner Will assist you in optimizing your inheritance to ensure you don’t end up losing everything or find yourself in a more precarious financial position than when you started.
A financial advisor can assist you in creating a varied investment portfolio that encompasses real estate or significant acquisitions, ensuring you have sufficient funds to retain these assets long-term.
Finding a financial advisor It doesn’t have to be complicated. With SmartAsset’s free tool, you can connect with up to three fee-only financial advisors in your region within minutes. These advisors have undergone scrutiny from SmartAdvisor and adhere to a fiduciary standard, ensuring they work in your best interest. Start your search now.
The initial publication of this article took place in January 2021.
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