Saving vs. Spending an Inheritance

Receiving an inheritance can be a confusing and stressful experience. What’s the right thing to do? Should I make that big purchase I’d been thinking about? Should I save it? If so, where and how? As many who have received a windfall can attest, without proper planning, any size inheritance can be squandered. Here are few steps to avoid making that mistake:

  1. Take stock. Good planning tends to start by answering two questions: what do you want? And what do you have? Make a list of all your financial objectives including short term goals like big purchases and log term goals like retirement or funding college educations for your children. Then review your assets (anything you own, including the inheritance) and your liabilities (anything you owe).
  2. Consider getting rid of revolving debt. Although it’s not the most fun, paying off debt might be the right choice and create a better quality of life in the long run. Paying off debt can free up cashflow, save you money on interest and make it easier to save for larger purchases in the future.
  3. Review your retirement savings. The average American has a little less than $150,000 saved for retirement by the time they are in their 50’s according to the Federal Reserve Survey of Consumer Finances. Considering the full Social Security Retirement age is between 66 and 67, and that most consumers will need at 8-10 times their annual income to retire comfortably, most American’s are extremely underprepared for retirement. Making a maximum contribution to your 401(k) or an IRA can save you money on taxes and help improve your odds. If you’re unsure where to start, consider reaching out to a financial planner.
  4. Review the purchases you want or need. An MIT study shows that when people use credit cards to make purchases, they tend to buy more expensive items and are willing to spend as much as double what they would spend when paying with cash. This is because credit cards diminish the feeling of loss associated with spending money. An inheritance can have the same effect, as it can feel like “extra”. Unfortunately, this can lead to overspending, as you feel the same reward of purchasing something you want, without the normal mental “cost”. Carefully weigh the discretionary purchases you’re thinking about, consider the long-term value and ask yourself if you’d make the same purchase if you knew you’d have to save for it instead.
  5. Make a plan! Considering all the above, take some time to plan out your intentions before you move forward with anything. If you’re having trouble, consider engaging with a financial planner who can help you map out the best approach. Whether you do it yourself or find help, having a plan will help prevent you from looking back and asking, “what happened to my inheritance?”