Photography by Paul Flessland
Treated wisely, inheritances can help people meet their long-term goals, from rescuing their retirements to paying off credit card debt to financing family education. But windfalls can turn into mixed blessings when people rush into decisions.
Research finds that one-third of Americans can expect to receive a significant inheritance, but many end up spending or giving too much when, in fact, developing a careful plan to spend, save and invest would help them meet their most important financial goals.
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Oftentimes, when we are introduced to individuals with inheritances or future inheritances, they fall into two camps:
1) Having the money already spent in their minds
2) Wishing to ignore the inheritance altogether
When we can develop a plan of action specific to their life, goals and financial circumstances, the best outcomes arise.
Here are five mistakes to avoid when receiving an inheritance:
No.1: Spending Mindlessly
Some people begin mindless spending on “just a small indulgence.” A series of those kinds of purchases can morph into a spending splurge that might rob people of their ability to reach their overall goals for the inheritance.
No.2: Going It Alone
Even Americans who manage their 401(k)s or their taxes on their own can benefit from help. That’s because a windfall, whether it’s an inheritance or lottery proceeds, is different. Those who receive an inheritance should consider assembling a team, including an estate attorney, an accountant and a certified financial planner.
No.3: Making Decisions Too Quickly
Be careful not to make any big life decisions — such as selling a house or quitting a job — too early in the process. An inheritance often coincides with loss, and many people aren’t thinking clearly when their emotions run high. Not too long ago, we saw a large inflow of mineral royalties and individuals wanting to quit their jobs immediately with the prospect that the oil would never stop pumping. By advising those individuals to take a pause and evaluate what would happen if oil prices dropped, we better equipped them to handle oil price fluctuations and depletion rates.
No.4: Becoming Paralyzed in the Investment Process
Sometimes people who receive a lump sum become so worried about “investing at the top” that they do nothing. They can consider dollar cost averaging (DCA), the investment strategy that divides available money into equal parts and then periodically puts the money to work in a diversified portfolio over time.
No.5: Providing for Everyone Except Themselves
People love their kids, friends and charitable organizations — so much so that they sometimes neglect to take care of themselves. Take a step back by pushing the pause button. There is plenty of time to provide generous support after a plan is established.
Receiving an inheritance is a great reason to consult a certified financial professional who can help you tailor a plan that achieves your long-term financial goals.
United Capital of Fargo
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