6 Ways to Ruin an Inheritance

Inheriting money or assets from a loved one can be a life-changing event. It offers opportunities to secure your financial future, invest in meaningful ventures, or even take that dream vacation you’ve always wanted. However, without proper planning, an inheritance can quickly dwindle away, leaving you with little to show for it. Understanding the common pitfalls can help you avoid these mistakes and make the most of what you’ve been given.

This blog will guide you through six major ways people often ruin their inheritances and how you can steer clear of these financial traps.

1. Poor Financial Planning

When you receive an inheritance, it’s easy to feel like you’ve suddenly come into a windfall that will solve all your financial problems. But without proper financial planning, that money can slip through your fingers faster than you realise. Here’s why financial planning is crucial and how you can go about it.

Understand Your Financial Goals

The first step in financial planning is understanding your financial goals. Ask yourself what you want to achieve with this inheritance. Are you looking to pay off debts, save for retirement, invest in education, or perhaps start a business? Having clear goals will give you direction and help you allocate your funds appropriately.

Create a Budget

Once you have your goals in place, it’s essential to create a budget. A budget helps you track your income and expenses, ensuring you don’t overspend. Yes, we know that most people hate the word 'budget', but it really is crucial. Start by listing all your monthly expenses and compare them against your inheritance. This will give you a clear picture of how long your inheritance can support your current lifestyle and where you might need to make adjustments. It may even give you an indication of the level of investment return required to maintain your lifestyle.

Seek Professional Advice

Financial planning can be complex, especially if you’re not familiar with the intricacies of managing large sums of money. Seeking professional advice from a financial adviser can be invaluable. A financial advisor can help you create a comprehensive financial plan, provide investment advice, and guide you on tax implications. They can ensure your inheritance is managed wisely to support your long-term goals.

Avoid Common Mistakes

Some common mistakes to avoid include:

  • Overestimating Future Income: Don’t assume that your inheritance will grow exponentially without a proper investment strategy.
  • Ignoring Inflation: The value of money decreases over time due to inflation. Ensure your financial plan accounts for this.
  • Failing to Reassess: Regularly reassess your financial plan and adjust as needed. Life circumstances change, and so should your financial strategy.

2. Impulsive Spending

An inheritance can feel like a sudden increase in wealth, tempting you to splurge on luxuries you might not have considered before. While it’s perfectly fine to treat yourself, impulsive spending can quickly deplete your funds. Here’s how to manage the urge to spend impulsively.

Understand the Risks of Impulsive Spending

Impulsive spending can lead to significant financial instability. You might find yourself buying expensive items that you don’t need or indulging in luxury vacations that, while enjoyable, don’t contribute to your long-term financial health. Once the inheritance money is gone, you’re left with depreciated assets and possibly debt.

Set Spending Limits

One effective way to control impulsive spending is to set clear spending limits. Allocate a specific portion of your inheritance for discretionary spending (yes, we're back to the budget). This way, you can enjoy some of your newfound wealth without jeopardising your financial future. It’s essential to stick to these limits and not dip into funds allocated for other goals.

Prioritise Your Purchases

Before making any significant purchase, ask yourself if it aligns with your financial goals. Prioritise spending on things that will bring long-term value. For example, investing in education or property can provide returns over time, whereas a luxury car might lose value quickly.

Delay Major Purchases

Consider implementing a waiting period before making large purchases. This could be a week or a month, or in some cases longer, depending on the size of the purchase. Often, the initial excitement will fade, and you’ll have a clearer perspective on whether the purchase is necessary.

3. Neglecting to Pay Off Debt

One of the smartest ways to use an inheritance is to pay off existing debt. Neglecting to do so can lead to financial difficulties down the line. Here’s why paying off bad or expensive debt should be a priority and how to approach it.

The Burden of Debt

Carrying debt can be a significant financial burden. High-interest debts, such as credit card balances, can accumulate quickly, leading to more money spent on interest payments than on the principal amount. This can erode your financial stability over time.

Prioritise High-Interest Debt

Start by prioritising high-interest debts. These are typically credit card debts, payday loans, or personal loans. Paying off these debts first will reduce the amount of money you lose to interest payments, allowing you to use your inheritance more effectively.

Create a Debt Repayment Plan

A structured debt repayment plan can help you systematically eliminate debt. List all your debts, including their interest rates and balances. Decide how much of your inheritance you can allocate towards paying off these debts and create a timeline for repayment.

Consult with a Financial Adviser

If your debts are substantial or you’re unsure about the best repayment strategy, consulting a financial adviser can be beneficial. They can help you prioritise debts and create a manageable repayment plan that aligns with your financial goals.

Avoid Accumulating New Bad Debt

While paying off existing debt is crucial, it’s equally important to avoid accumulating new debt. Develop good financial habits, such as budgeting and saving, to prevent falling back into debt.

4. Ignoring Tax Implications

Receiving an inheritance often comes with tax responsibilities that, if ignored, can lead to significant financial consequences. Understanding and addressing these tax implications is crucial to preserving your inheritance.

Know the Tax Laws

Tax laws regarding inheritances vary depending on where you live and the nature of the inheritance. Some inheritances might be subject to estate taxes, inheritance taxes, or income taxes. It’s essential to understand the specific tax obligations that apply to you. In some cases, you have a limited time frame from the distribution of an estate before taxes start to apply.

Consult a Tax Professional

Tax laws can be complicated, and misinterpreting them can lead to costly mistakes. Consulting a tax professional can provide you with clarity on your tax obligations and help you navigate them efficiently. A tax professional can also help you explore potential tax-saving strategies.

Plan for Tax Payments

Once you understand your tax obligations, plan for these payments. Set aside a portion of your inheritance to cover any taxes owed. This proactive approach will prevent you from facing unexpected tax bills and financial strain.

Consider Tax-Advantaged Accounts

Depending on your circumstances, you might benefit from placing part of your inheritance into tax-advantaged accounts, such as retirement accounts or education savings plans. These accounts can provide tax benefits and help you achieve your long-term financial goals.

By understanding and addressing the tax implications of your inheritance, you can ensure that a significant portion of your funds is preserved and used effectively.

5. Poor Investment Choices

Inheriting a substantial sum of money opens up many investment opportunities, but poor investment choices can lead to significant losses. Understanding how to make informed investment decisions is crucial for preserving and growing your inheritance.

Understand Your Risk Tolerance

Before making any investments, it’s important to understand your risk tolerance. Your risk tolerance is essentially your ability and willingness to endure the fluctuations in the value of your investments. This can vary based on your age, financial situation, and long-term goals. Assessing your risk tolerance can help you choose investments that you’re comfortable with and that align with your financial objectives.

Diversify Your Investments

One of the key principles of investing is diversification. By spreading your investments across different asset classes (such as stocks, bonds, real estate, and cash), you can reduce the risk of significant losses. Diversification helps ensure that the poor performance of one investment doesn’t have a disproportionate impact on your overall portfolio.

Avoid High-Risk Investments Without Proper Research

High-risk investments can promise high returns, but they also come with the potential for significant losses. It’s important to thoroughly research any investment opportunities before committing your funds. Avoid jumping into investments that you don’t fully understand or that seem too good to be true. Remember, if an investment opportunity seems too good to be true, it probably is.

Seek Professional Investment Advice

Consulting with a financial adviser can provide you with valuable insights and guidance on investment decisions. A financial advisor can help you create an investment strategy that aligns with your risk tolerance and financial goals. They can also help you avoid common investment pitfalls and make informed decisions.

Regularly Review and Adjust Your Portfolio

Investing is not a set-it-and-forget-it activity. Regularly reviewing your investment portfolio ensures that it continues to align with your financial goals and risk tolerance. As your life circumstances change, your investment strategy may need to be adjusted. Regular reviews can help you stay on track and make necessary adjustments to optimise your returns.

6. Family Conflicts and Legal Issues

Inheriting assets can sometimes lead to family conflicts and legal issues, which can diminish the value of the inheritance and cause emotional distress. Understanding how to navigate these challenges is essential to preserving your inheritance.

Communicate Clearly with Family Members

Open and honest communication with family members about the inheritance can help prevent misunderstandings and conflicts. Discussing the terms of the inheritance and any plans for the assets can help set expectations and reduce the potential for disputes.

Understand the Legal Aspects of the Inheritance

It’s important to understand the legal aspects of the inheritance, including the terms of the will or trust and any applicable laws. If the inheritance involves real estate, business interests, or other complex assets, you may need to navigate legal requirements and procedures. Consulting with an estate lawyer can provide you with the legal guidance needed to manage these aspects.

Create a Clear Estate Plan

If you are the beneficiary of an inheritance, it’s also a good time to think about your own estate planning. Creating a clear and legally sound estate plan can help prevent future conflicts and ensure that your assets are distributed according to your wishes. An estate plan can include a will, trusts, and other legal documents that outline how your assets should be handled.

Document Everything

Keep thorough records of all communications, transactions, and legal documents related to the inheritance. Documentation can be crucial in resolving disputes and providing clarity on the terms of the inheritance. It can also protect you in case of legal challenges.

Conclusion

Inheriting money or assets can be a significant financial change, but without careful handling, it can quickly be squandered. By understanding and avoiding common pitfalls such as poor financial planning, impulsive spending, neglecting debt repayment, ignoring tax implications, making poor investment choices, and navigating family conflicts and legal issues, you can make the most of your inheritance. Remember, the key to preserving and growing your inheritance lies in informed decision-making and seeking professional advice when needed.

 

To Your Financial Success!

Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd - No: 200305462G | MAS License No: FA100035-3

To learn more about how we may be able to help you, please contact us:

✆         +65 8282 5702
✉         jarrad.brown@gfcadvice.com
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.

*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.

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