Very few people are prepared to receive an inheritance. Most people don’t know what to do when they receive news like this, and this is why you should be aware of some of the most common inheritance mistakes.
When you receive a sum of money, it is common to make mistakes, but if you know about them, you can do your best to avoid them. Such a windfall can make you act without thinking at all, impulsively, and this can lead to money loss.
The wise thing to do is to stand back, consider your options, and try to make well-informed decisions on how to spend your inheritance. Try to preserve your inheritance and your financial future by creating a plan that aligns with your financial objectives.
Read on and find out about the most common inheritance mistakes that people make. Learn about them, and always be one step ahead of the game.
1. Spending the money too quickly
If you inherit some money, one major risk is spending it too soon. What you should do is take care of it, because getting an inheritance might help you achieve your long-term financial objectives. We know that it may be difficult to resist the urge to spoil yourself, but think long-term.
Maybe you like the idea of spending money on luxury items like a boat, a timeshare, or new cars, but you need to know that these things can rapidly lose value. Rather, you can better invest in a way that helps you generate an income stream that supports you in the long run and yet allows you to meet your short-term objectives. Try to use the money for retirement, an early mortgage payment, or education expenses for your children.
It’s best to hold off on making any type of major purchase since this is one of the most common inheritance mistakes. This is especially true when you are still dealing with the stress and sadness of losing a loved one. Also, be aware that even small purchases should be made with caution since they can add up in no time.
2. Forgetting about the taxes
Keep in mind that taxes might be significant, and because of this, you should consider them in your financial strategy. Things are not that simple, and since there are many types of assets that you might inherit, the taxes will also be different. So be responsible and learn about the taxes.
For example, we know that it may be tempting to pay off your house and withdraw money from an inherited retirement account. But once you do this, you are unable to reverse it. All of these tax consequences will become a problem later. Your tax bracket may increase due to a sizable taxable withdrawal, meaning you may owe more than you initially thought. And who wants that to happen? No one!
What you should be aware of about this one of the inheritance mistakes is that there are some limitations that might appear based on your taxable income. These include your ability to make a Roth IRA contribution, your eligibility for specific benefits, your Social Security tax, your Medicare premiums, and more.
3. Letting emotions cloud your judgment
Ok, so you inherit a large amount of money. What are you doing next? Maybe you think about stopping contributing to your retirement account or quitting your job just because you no longer see retirement as a priority. However, that might be extremely dangerous. It is true that money may change a person’s life, but this change is not always for the best.
Losing a person that you love is not easy, and this might have a heavy emotional impact on you. That’s why you should wait until you feel better before making any decisions about the money that you have inherited.
There are many examples of people who let emotion cloud their judgment and make bad decisions about their money. Maybe they invested them in something that was not profitable, or maybe they just spent the money on random stuff that they didn’t need. Whatever you do, try to avoid making these inheritance mistakes and protect your money.
4. Not doing your research before donating money to charity
We are not discouraging donations to charities; we just want to tell you that you should be careful and do your best to avoid inheritance mistakes. It is amazing to contribute to charity, but you need to be informed and not contribute too lavishly or too soon.
Giving to a charity that your relative was passionate about and held dear may be a beautiful gesture, but when done “right,” it can be even better. By making a legacy donation, you can also help yourself. This type of donation can help you maximize your tax savings, and in the end, you will be able to give a larger donation or use the money for other things.
Do your research and know everything about the charity you plan to donate to. This is a crucial step that you cannot miss. In this way, you can avoid scams and protect your money.
5. Not having a realistic plan
In order to avoid the most common inheritance mistakes, the best thing that you can do is to have a plan. Yes, a plan can save you most of the time, and in the case of an inheritance, a plan can make a difference.
You can take care of it by yourself, but if you want something more professional, you can work with a financial advisor. Most of the time, people avoid consulting with experts because they think it will cost them a fortune, but in general, the prices are not that high. Also, using some of the inherited money for this is, for sure, not a waste.
Hiring a financial advisor can help you minimize your financial liability, prepare for an investment, prioritize savings and spending, maximize retirement savings, and overall make the best decisions about your money.
Imagine this whole scenario as that time, you went to the grocery store without a list. It was probably a mess, and you made a lot of mistakes, such as buying something twice or forgetting to buy the essentials. Spending a lot of money without a plan is, for sure, a disastrous decision!
6. Investing without research
It may be intimidating and difficult to navigate the financial world if you have never invested before. But this should not make you afraid to invest. It is a good idea to invest the money you have from inheritance, but you should be careful about it and not spend all of your budget on something that will not make you more wealthy.
You can be smart about it and try to avoid the inheritance mistakes that most people make by being informed. Evaluate your current financial needs. Maybe you have credit or a student loan. Before investing in anything, you can erase them first.
In any case, before you lock all of your inheritance into a difficult-to-access investment account, you’ll need to take care of your requirements and have a strategy for how to use the money.
If you are curious about learning more about investment, this might be a good beginner guide: HOW TO INVEST
You should also read: Here’s How Americans Spend Their Family Budget On A 100-Year Span