Inheriting a windfall may seem like a dream come true, but it can cause tremendous anxiety, guilt, and even make your financial situation worse.
Mike and Noel were both 34, newly married, and had spent their $171,000 inheritance in about a year. “We’re screwed,” Noel told Ramit Sethi on his podcast, I will teach you how to be rich. (1)
Mike’s six-figure salary supported Noelle while she went through law school, but they struggled with money management, even before the inheritance.
After spending the inheritance, they have $30,000 in assets and another $30,000 in investments, zero savings, but $244,000 in debt, giving them a net worth of about negative $200,000.
Noel later regretted using the money as a “guilt-free spend”, while Mike felt anxious and stressed, leading to tension and arguments over finances.
Although they used part of their inheritance to pay off debts, they soon accumulated more: Noel spent $30,000 on furniture, $10,000 on clothes, and $10,000 on a trip to Mexico. Mike purchased a hair transplant and a Pokémon card, which he considered an “investment.”
While there are a lot of issues to address here – from Mike’s money anxieties to Noel’s drug addiction issues – their circumstances illustrate how quickly windfalls can disappear without clear priorities, budgets and investment plans, and highlight the risks of lifestyle changes and impulsive spending.
According to the latest Cerulli Edge report, Generation X and Millennials are expected to inherit $124 trillion in assets by 2048, the so-called Great American Wealth Transfer, with Gen (2)
However, some heirs view inheritances as regular income rather than long-term capital. Without a plan, even a six-figure windfall can disappear quickly.
Part of the reason may be psychological. For example, Noelle inherited money from her father, with whom she had a difficult relationship. “He was an alcoholic and a drug addict and was not in my life at all, so I felt very guilty about inheriting his assets,” she told Sisi.
The Harris Poll report found that inheritance is accompanied by mixed emotions: a third (33%) of young heirs feel pressured to manage larger or more complex assets, while a similar proportion (34%) are concerned that these assets will be mismanaged. (3)
While most heirs feel grateful and relieved about their newfound financial security, one in five (20%) feel stressed, 18% anxious and 15% guilty. (3)
This phenomenon is sometimes called sudden wealth syndrome (SWS), a psychological condition that affects people who suddenly acquire wealth through an inheritance, lottery, legal settlement, or other windfall. Reasons may include feeling disconnected from your previous life or an intense fear of losing everything.
These feelings can lead to decision paralysis or poor financial choices.
Read more: The average American net worth is a surprising $620,654. But that makes almost no sense. Here are the numbers that matter (and how to make them soar)
A large inheritance can help you pay off debt and invest for the future, but it can also Very It’s easy to get tempted into spending a lot. That’s why having a plan—tailored to your specific situation—can go a long way toward helping you continue your legacy.
FINRA recommends postponing any major moves, such as resigning or making major purchases, for the first 6 to 12 months. (4) Consider this a cooling-off period.
In the meantime, keep your cash in a safe account, such as a savings account or certificate of deposit (CD). If the amount is large, spread it across multiple accounts to stay within federal insurance limits. (4)
Set aside money immediately to pay taxes on your windfall. If you haven’t already, build an emergency fund that covers three to six months of income.
Sethi says on his website that if you have high-interest debt, such as credit cards or personal loans that charge 20-25% interest, pay it off first because it “provides you with an immediate guaranteed return that is nearly impossible to beat with any investment strategy.” (5)
But you might want to delay paying off a low-interest loan like a mortgage, because Sethi says the money “may generate better returns if invested in a diversified index fund over time.” (5)
From there, think about your financial goals. Are you saving enough for retirement? Buy a house? Work fewer hours or retire early? Starting a business, going back to school, or traveling?
Also consider lifestyle inflation. For example, inheriting a windfall doesn’t necessarily mean buying a mansion or a luxury car. Consider ongoing costs such as property taxes, insurance and maintenance to ensure sustainability.
You may want to consider topping up your 401(k) and IRA and saving toward your goals. For short-term goals, such as a wedding, a high-yield savings account, money market account, or CD means your funds are more accessible. For long-term goals, consider stocks, bonds, or alternative assets.
But Sisi warns against getting too fanciful about investing. “Boring index funds and target-date funds are great for most of your investment allocations,” giving you broad market exposure without requiring you to “become a stock-picking expert overnight.” (5)
Sethi’s smart spending plan recommends setting aside 50-60% for needs, 10% for investments, 5-10% for savings, and another 20-35% for guilt-free spending. (5) This also applies to windfalls. So you can still have fun with your money without going bankrupt after a year.
While inheriting a windfall can be overwhelming—and friends and family may offer unsolicited advice—it can be wise to seek guidance from a certified financial advisor, insurance agent, and tax professional, especially if the windfall is large.
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YouTube (1); Cerulli (2); Harris Poll (3); FINRA (4); I Will Teach You to Be Rich (5).
This article provides information only and should not be considered advice. It is provided without any warranty of any kind.
