Unfortunately, while a large lump sum may seem like a lot at the time, the money may not go as far as you think. Here are four examples of poor decisions made by those who have received a large inheritance.
1. Spending the entire inheritance immediately. This is the obvious one, but it’s easy to see why it would happen. When your bank balance goes from almost nothing to suddenly having hundreds of thousands of dollars or more in it, it becomes very enticing to start looking at new homes, new cars and lavish vacations. And hey, who’s to judge and say that isn’t perfectly okay for you to do? You’re certainly entitled to spend your money however you choose.
Just make sure you are on track to reach your basic financial goals before allocating money toward “extras.” If you have verified you can sustain a large withdrawal for one of the big expenditures listed above and still be on track to reach your financial goals, go crazy! But it’s important to also remember that with more expensive houses comes higher property taxes. And with more expensive cars comes more expensive car insurance, and so on. So if you have not evaluated your progress toward your basic financial needs, or if you find you are behind where you should be, it may be prudent to hold off on elevating your lifestyle so quickly.
2. Investing prematurely in a business. Once you have received your inheritance, you may also find yourself with opportunities to invest in business opportunities. These opportunities may be with a friend or family member’s small business, or perhaps with a business of your own you’ve considered starting for years. But like any investment, it is crucially important to carefully evaluate the business and do your due diligence before making any decisions.
If your friends or acquaintances become aware of your newly acquired wealth, they may try to obtain financing or garner an investment from you at your kitchen table after a 30-minute pen and paper presentation. You need to set a standard or a policy for how you’ll evaluate those “opportunities.” And don’t forget the age-old investment advice of never putting all of your eggs in one basket, which is something you should certainly consider when you think about how much, if any, of your inheritance you plan to invest in a start-up or small-business opportunity. As mentioned above, if you do your due diligence and the business plan looks strong, it could be a fantastic opportunity for you. But you should be slow in making these decisions.
3. Loaning people money. Unfortunately, when you acquire wealth, you become a target for some of those around you. And you may even be approached by a friend or extended family member who is in need of financial help. For some it might be easy to say no. For others you may really want to help.