Dealing with an inheritance is something that many Australians will do in their lifetime. So how do you best manage a lump sum that has come your way and use it to help you reach your financial goals?
1. Have a strategy
The first thing you can do with an inheritance is decide how you can use it to set up financial security for your future. So first up – have a strategy. This is important because: “Most people run through an inheritance in two years or less,” says Jason Flurry, the president of Legacy Partners Financial Group. In his experience, the first mistake people make is they “blow the money on stuff for themselves”.
2. Take stock of where you are at
If you’ve inherited money, you need to know what your financial situation is now so you can make a realistic plan. Your personal circumstances will influence how best to use your inheritance. Whether it’s better to put the money towards paying down debt, investing, your retirement or starting a business, are all going to depend on the amount of money you’ve inherited and what will serve you best financially. Get your financials together and see what the fiscal lay of the land is.
3. Get advice
It’s a very good idea at this point (if not before) to speak to your financial adviser, who can really help you plan how to use and grow your inheritance. Your adviser can also help you with any tax implications of your inheritance.
4. Don’t rush into action
If you’ve had a financial windfall, take your time before taking action. Flurry says, “The temptation is to feel like you have to do something, but you really don’t. Sit down and dream a little, then back into the numbers and ask, ‘How can we do this with the least amount of risk?’” Acting too hastily can lead to trouble. Paying off your mortgage without thinking about future income in your old age, for example, could leave you living debt-free but in poverty. “If your house is paid for but you run through everything else, you can’t use shingles to pay for groceries,” Flurry says. “Then what do you do?” “You don’t want to be in that situation.”
5. Watch out for high risk investments
When you’re given money, especially if you weren’t expecting it, it does not always have the same value as when you have earned it. The danger is that you may be tempted to put it on high risk investments or business ventures. A slow and steady approach to financial independence may not be as exciting as a get quick rich scheme, but it may serve you better in the long term.
While it’s good to use an inheritance wisely, this doesn’t mean you can’t enjoy some of it immediately. When you create your strategy, factor is some fun spending. It’s all about balance.