Inheritance

Emotionally Charged Money: Inheritance

Image: money from heaven

Image: money from heavenYou may be one of the many Baby Boomers or  Gen-Xers who have received an inheritance or will in the future. Studies predict that the wealth transfer from the “Greatest Generation” to their heirs will total in the trillions. If you are or will be a beneficiary, it pays to prepare yourself, as no money is more emotionally charged than inherited money.

There can be several reasons why emotional thinking can outweigh rational thoughts when it comes to inheritance. If you received it from your parents, you may recall how hard they worked for it. Your dad toiled at the office and your mom took care of the home and kids. You remember how they rarely relaxed or took a vacation, because they wanted to create a good life for you and not be a burden to you in their old age.  You may feel unworthy of their largesse.

Or, an inheritance can create a rift between you and your friends or family who aren’t as fortunate. You may feel guilty about your new change in financial status. You may also feel shame about how other people, in general, have so much less than you.

My clients who have received inheritances talk about feeling anxious, relieved, worried, happy, sad, guilty, and elated. These are natural reactions and to be expected. Problems arise when emotions dictate how you spend, invest, and save the funds.

Tips for Managing an Inheritance

Take a moment to absorb some of these ideas to prepare yourself and handle this potentially life-changing event:

  • Talk to a trusted professional about your feelings about the inheritance. Process them as much as possible before taking any action.
  • Make a list of things/experiences you want to buy and be careful not to overspend.
  • Create a plan for charitable giving and learn about giving vehicles such as donor-advised funds.
  • Carefully way out the pros and cons of lending family or friends money.
  • Develop a plan for investing the funds so as to earn a good return.
  • Do some financial planning. This windfall may be just what you needed to fund your retirement.
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Financial Windfalls: How to Manage Sudden Wealth

Financial Windfall Sudden Wealth
Financial Windfall Sudden Wealth

An inheritance, a big bonus, a surprise payout – expected or unexpected, receiving large sums of money can be stressful. Sudden wealth or a financial windfall can derail even the most prudent people.

Some people feel guilty about their good fortune and react by being overly generous or too frugal. Others immediately start spending, erroneously thinking that the money will last forever until it doesn’t. Bottom line: this type of income can be emotionally charged.

We have all heard stories about professional athletes, lottery winners, or celebrities who blow through vast amounts of money and even end of bankrupt. But, this can happen to anybody.

Sudden Wealth Syndrome Is Real

This behavior is common and has a name: Sudden Wealth Syndrome – symptoms include heightened stress, guilt, social isolation, mistrust of others, and poor spending habits. Sudden wealth can also cause a person to feel so conflicted that they don’t take any actions at all.

As a financial planner, I have seen people take the following actions soon after receiving a financial windfall:

  • Quit their job before they have a new one lined up.
  • Decide to do a major remodel on their home instead of their previously planned appliance upgrade or fresh paint.
  • Buy family members expensive gifts.
  • Give money to family or friends who are in need.
  • Buy expensive cars (a Tesla instead of a Prius).
  • Take luxurious vacations.
There is nothing wrong with any of the above actions if well thought out and considered within a broader plan. If done impulsively, or to relieve emotional stress, they can create feelings of guilt or remorse that can last longer than the money spent.

Is It Possible To Not Get Caught In The Sudden Wealth Trap?

Yes, here are a few ideas:

Develop Mindfulness. Think deeply about what you want to do with the money to match your values, and make decisions with clarity to use the windfall wisely and well. Talk to your trusted circle – a friend or family member, a therapist, or advisor – before making any large purchases or life-changing decisions.

Try not make any large purchases until you’ve had a chance to make your dream list and pare it down to realistic priorities before you write the checks.

Sudden Wealth Creates Opportunities

Sudden wealth creates opportunities– for security, for pleasure, for doing good – but without careful planning, it can create headaches (and heartaches too). With a plan in place, you can avoid the negatives (regret, remorse, guilt), and embrace the positive outcomes from a financial windfall.

Take The Next Step

Download our free guide to find out what to do if you’re experiencing the symptoms of sudden wealth syndrome, and learn what your next steps should be to adjust to and maintain your newfound wealth. 

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Short List for your Finances 2014

listThere are many actions you can take to improve your finances, and that’s sometimes the problem. I have compiled a short list of ideas that can make a real difference in your financial health. Copy and paste this short list into Evernote or other list-making software or  print it out and tape it to your fridge. Then check off the items as you complete them and celebrate with your favorite indulgence – mine would be a piece of high-quality chocolate or a glass of Pinot Noir!

1. Write Down Your Financial Goals. We all know that writing things down makes them more real. Just having ideas floating  around in our heads  doesn’t cut it. Quantified goals are more likely to be achieved, so be as specific as possible as to deadlines and numbers.  For example, “I want to increase my net income by 20% in 2014 through a combination of decreasing expenses and adding new clients,”or “I want to reduce my spending on dining out from $500 to $300 per month.”  Next, you can make a plan to tackle your specific goals.

2. Make a Plan to Tackle Your Goals.
 Big goals can seem less daunting if you break them down into action steps. Take your list of goals and write down a simple plan of action for each. For example, taking the first goal above, an action item could be to review all business expenses from 2013 and determine whether they are 1. necessary 2. you could find a cheaper alternative, or 3. you could get away with spending less. Make a commitment to tackle the action steps by scheduling them into your calendar. 

3. Review Your Retirement Saving Strategy.  Most of us are saving on a regular basis to a retirement plan through our employer or through a self-employed retirement plan, but not all of us are saving as much as we could. Review your current payroll deductions into your 401(k) or your IRA contributions and see if you can increase the contribution amount to this year’s limits. Time is as important as the amount of money you save – it pays to start earlier than later.

If you are contributing to a Roth IRA, congratulations! – you have taken advantage of an excellent retirement savings vehicle. If you follow all the rules, you will only pay tax on the money invested once – before you contribute to the Roth. After that, your contribution and earnings can grow tax free for years.

4. Call your Insurance Agent. If you have been paying your insurance premiums for auto, home, and liability coverage on automatic, take the time to call your insurance agent or shop your insurance to feel confident you’re getting the best deal and your coverage is adequate for your current life situation. You might be surprised to find out that you have been overpaying or are underinsured.

5. Make a Charitable Giving Plan. Giving to needy or inspiring causes is a wonderful thing – the act of giving uplifts us and benefits the recipient. It  can also have excellent tax advantages, so it pays to know the different ways to give. For example, a great way to donate to a charity is to use a Donor Advised Fund (DAF). DAF’s can be funded using appreciated securities rather than cash, the securities are then sold within the fund to avoid the capital gains tax. The tax deduction is taken in the year when the account is funded avoiding ongoing record-keeping.

6. Understand Your Parent’s Finances. As uncomfortable as it may seem, it’s really important to talk to your parents about their financial planning so you know where they stand financially now and when they die. Questions to get answers to:  Do they have a plan to pay for possible long term care expenses? Have they created wills and trusts so that their estate is distributed with the least amount of costs and hassle? Do they have Durable Powers of Attorney set up for healthcare and finances? Knowing the answers to these questions before your parents grow too old will reduce stress later and possibly save dollars.

I’ll stop now and give you a chance to get started on your short list! If you enjoyed this post and found it useful, please let me know by commenting, tweeting it, or posting it on LinkedIn, Facebook, or Pinterest and I will plan to write similar posts in the future.

 

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Curtis Financial Planning