Joni Lipson, 56, of Philadelphia went through a difficult time when money was tight. A tumultuous several-year period in her life brought divorce, kids' college expenses, a move to a new city, getting a job for the first time in years, and the death of her parents. But that time ultimately ended when she received a sizable windfall from an inheritance and a divorce settlement. After going without for so long, it would have been easy to squander a large sum, but Joni sought professional help: Mary Jo Harper, a wealth management adviser with Merrill Lynch.
With guidance and planning, Joni was able to buy a house and build a retirement fund. Most important, she was able to pursue her passion: competitive ballroom dancing. Joni spends up to $125 an hour for lessons, about $1,000 per competition, and $2,000 per costume. It amounts to serious money over the long term, but Joni designated her dancing hobby a priority, and she built her inheritance plan to include it. "Dancing is very expensive, but I've worked really hard at it for a long time," she says. "I would have had to give it up without the inheritance."
Financial legacies such as Joni's can afford a more comfortable lifestyle or deflate quickly. Too many heirs blow through such inheritances in short order. As many as 70 percent of people who receive a windfall fritter it away in just a few years, the National Endowment for Financial Education estimated in 2002. To manage your inheritance well, use this quick guide.
The golden rule when dealing with an inheritance, especially one that comes quickly and unexpectedly, is to give yourself time to think. Don't immediately spend a dime of the inherited money, not on a sports car or a new wardrobe. Don't quit your job, or even give to charity. Resist the urge to improve your home or buy a new one.
"The number one thing people want to do with sudden money is to spend it on a house, either expanding the home they have, remodeling it, or buying another house," said Susan Bradley, author of Sudden Money: Managing a Financial Windfall (Wiley) and head of the Florida-based Sudden Money Institute, a national network of financial planners who specialize in newfound wealth. "Just decide not to decide for a while," Bradley says.
An exception to the time-out rule would be when you're in financial crisis and need to pay off debts to rescue you from certain personal bankruptcy. If it's not that dire, leave the money alone for three months, six months, a year -- as long as it takes for you to make plans and gain perspective on what the money means to your life.
Give yourself time to grieve and think about how the inheritance makes you feel. Confusion, guilt, a feeling of unworthiness, anger, even shame are all common emotions that you need to work through. Many bad money decisions stem from emotion. For example, hanging onto Dad's valuable coin collection because he loved it, despite needing the money. Or buying an expensive dining room set because mom always wanted you to have one. "Sometimes the decisions are based on the relationship, not on who you are, what you need, and what's best for you," Bradley says. "When you're grieving, you think spending money will make you feel better. It won't."
With a spouse, new money can upset the financial dynamic in the relationship, and divorce is common. Avoid saying, "It's my inheritance, I'll do what I want with it." Emphasize to your children that you must take time to decide what to do with the money and that they should have no expectations about how you'll share it. Then see a lawyer to revamp your will and power of attorney. Visit your insurance agent to review new needs. And check with an accountant to determine whether you need to take any immediate actions for tax reasons.
Jayme H. Simoes was just 20 years old when his grandmother passed away. She left him a small fortune accumulated from the sale of his grandfather's Chicago-based business. Then a college senior, he well remembers being handed the first installment of the inheritance, a check for $30,000. The total value of his inheritance was in the neighborhood of $700,000.
Jayme had no clue about handling such a sum of money. Most people don't, which is why it's a good idea to put the windfall some place safe. Disregard advice -- especially coming via unsolicited phone calls -- to have the "money work for you" during the first few months after receiving it. Getting a big return on the money is not the primary concern at this stage. Set aside the money first, whether in a bank savings account, short-term certificate of deposit, money market account, or similar low-risk insured place. Especially avoid such volatile investments as stocks and stock mutual funds. Jayme stashed the money in a bank account until he could figure out what to do. Early on, he hired a financial adviser and took an avid interest in money and investing. He eventually used some of the money to start his own successful public-relations firm in Concord, New Hampshire.
Near the top of your priority list should be eliminating consumer debt, especially high-rate credit card debt, financial advisers agree. But think twice about paying off your mortgage, unless owning your home outright is an important goal for you. Your mortgage interest rate is likely low, and the money may be better used elsewhere. The same goes for paying off college loans at low interest rates. Turn to your savings, which may include an emergency fund of about six months living expenses stashed in a safe, easily accessible account. Then there are the usual savings goals: retirement, kids' college expenses, and wedding costs.
Keep in mind that saving for retirement should almost always take priority over saving for college expenses. You can easily get low-interest loans for college costs, but few banks are in the business of lending you money for retirement. If you already have a sound financial plan, stick with it. For example, if you're already comfortable with a retirement plan that's 60 percent invested in stocks and 40 percent in bonds, invest the retirement portion of the inheritance money the same way. After you firm up debt and savings goals, then you can figure in the spending wants from your "what-if" list.
Managing an inheritance gets easier with professional financial help, especially with an inheritance that seems large, such as several years' salary. Look for an adviser who can plan for your entire financial life. One good source of advisers is the National Association of Personal Financial Advisors, online at napfa.org. These advisers work for straightforward fees, not commission. That can help avoid conflicts of interest that sometimes arise when an adviser makes recommendations based on how much commission he stands to earn. Consider advisers who have considerable expertise in working with people who are dealing with financial windfalls. The Web site suddenmoney.com lists dozens.
If driving an expensive sports car made your final list, rent one for a couple of months to see if driving a flashy car is the thrill you thought it would be. Rather than quit your job to work for a charity, spend time volunteering first. Before spending large amounts of money on your house, start with modest less-expensive home projects. Baby steps like these will help you avoid irreversible decisions you later regret.
Explore your new money boundaries. This is where you get to play the fun game of "If only I had the money, I would...." This exercise is more challenging than it might seem because most people, whether they're a chronic saver or habitual overspender, know the money range they live within. "We're pretty comfortable where we are. We know our limits," says Sacha Millstone, financial adviser with Raymond James & Associates, who has a special program solely devoted to clients who receive sizable inheritances. "An inheritance really changes that. It's not uncommon that they start spending way more than their inheritance can support. It's because they don't really know what their new boundaries are."
Besides fun spending and the usual financial planning, such as retirement, brainstorm some meaningful uses of money. That could include sharing the money with family, making donations to charities, or starting the business you always dreamed of. "It's a good time to look a little deeper," Bradley says. "Ask yourself what you want your life to look like."
Joni Lipson's passion for ballroom dancing is a good example of making use of the money for something you truly love. "It doesn't all have to be serious and purpose-driven," Bradley says. "There's nothing wrong with enjoying money and what it can do."
Avoid these inheritance mistakes:
Originally published in Better Homes & Gardens magazine, June 2006.