5 tips for handling an inheritance the right way

Take your time

Some may look at an inheritance as a financial windfall like winning the lottery or hitting it big in the stock market. Getting and inheritance is a little different because it typically comes at a price of losing someone you love. When someone gets an inheritance, grief and other emotions can prevent that person from making sound decisions.

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Any time you get a financial windfall, the best thing to do is nothing (for a while). This is especially true when it comes to receiving an inheritance. Don't feel the urge to invest it into a portfolio. Don't feel the urge to give any of it away. And especially don't fall into the common trap of spending it. Put it away into a high interest savings account and take your time to really think about what you want to do with the money. Try to fast forward your life 5, 10, 15 years and think about what you hope your life looks like as a result of this windfall.

You've all probably heard the stories about people who have blown financial windfalls because of ongoing spending sprees within three to five years of getting their windfall. To prevent this from happening to you, just take your time before making any decisions, especially spending decisions.

It may sound a little obvious and a little corny but take some time to make a financial plan before you decide on what to do with a large sum of money.

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Invest for your future

Before you go and invest your inheritance, make sure you take the time to look at the big picture to see how this inheritance affects your longer term financial future. Too many people feel the urge to put all the money into stocks to try and earn big returns only to find they took more risk than was comfortable. Getting a financial windfall with the intent to invest it should put anyone in a better financial position. Hopefully it puts you in a position where you don't have to take a lot of risks. You'll only know that if you run some big picture projections.

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Pay off debts

Paying off debts might be the best investment you make. Paying down a 6% debt has a pre-tax equivalent of over 9%. I don't know about many investments that can guarantee a pre-tax return of over 9%. Don't forget that paying off debts is a winning strategy.

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Develop a spending plan

Rarely do many people need help developing a spending plan. In a world built for consumption, there are unlimited opportunities to spend an inheritance. As a result, it is imperative to develop some type of plan before spending.

I've always been a believer in having balance and when it comes to a financial windfall, that means saving some for the future but also that some of it gets blown in spending. To satisfy the need for some instant gratification, set aside a certain amount of money just to spend money. Spending often makes us feel good because it is fun so set aside up to 10% just for enjoyment. Take the rest and be more prudent.

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Create your own legacy

Losing a loved one is always an opportunity to reflect on your own life to create your own legacy. What do you want your life to stand for? How do you want to be remembered? Most people won't remember you for the car you buy or the new carpet you put into your house or any of the electronic gadgets that are so tempting to pick up. Maybe part of your financial windfall is best used to remember the person that left you the money. It's certainly a great time to think about your own estate and whether your own will is up to date.

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