Any financial windfall you receive is going to introduce new stresses to your life. Receiving a lump-sum of money can be life-changing if handled properly. Regardless of the amount of money, feeling overwhelmed is to be expected when your future is on the line. This blog will help you avoid the biggest mistakes you can make when inheriting a large sum of money.
First off, you need to take a minute to collect your thoughts. Nobody is basing their financial plan off an inheritance (and if you are, you need a better plan) so this money is bound to come with grief, stress and many other emotions. Breath. Now is not the time to be making short or long-term decisions about your financial future. Take a few days or weeks to allow yourself to get past the initial shock and give yourself a chance to make rational decisions.
This blog will provide you with a few possible uses for your new wealth.
Establish an Emergency Fund
Having a safety net in the form of 3 months of expenses set aside in a savings account is a great first step if you haven't already done it. This emergency fund will allow you to sleep peacefully at night knowing that an unexpected job loss or illness will not cause financial ruin.
Pay Down Debt
Even with today's low interest rates, debt can be incredibly expensive. In addition to financial consequences, debt can have negative mental health implications. Clearing high-interest debt (such as credit cards) first can provide you with additional cashflow to use on larger items such as car loans and mortgages. If you feel burdened by your debt, it may be wise to use your windfall to eliminate it.
Pay It Forward
An inheritance can create an opportunity to provide others with the same sort of financial relief you experienced. It may come in the form of RESP's (Registered Education Savings Plan) for your children/grand-children. You may opt to update your estate plan to include additional beneficiaries. You may even decide to allocate a portion of the assets to be donated to a charity/cause that is close to your heart. Most importantly, find a way to use the money to honour the one who left it to you. Perhaps a parent left you this money and the thought of taking your family on a trip to a destination from their past is something that sounds fitting.
Fund Your Retirement
When considering uses for your inheritance it is crucial to also think about your long-term goals. Are you saving enough for retirement? Does your financial plan show that your retirement income will cover all of the expenses you'll have? Have you maximized the potential benefits an RRSP/TFSA can provide? Speaking with a financial advisor can shine some light on your retirement picture, no matter how far away it may be. Look for an advisor who offers fee-for-service advice. Avoid advisors with proprietary products who will be biased in what products they try to sell you. You are looking for an advisor who truly has your best interest at heart, not a salesperson. Investing your inheritance can create an opportunity for you to secure your future if done properly.
I hope this blog has given you something to think about should you ever find yourself in this situation. An inheritance is a special gift that should be treated as such.
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