Surprise, happiness and then indecision. This is generally the emotions experienced when you receive an inheritance, especially if it’s a big, fat inheritance.
Making smart finance decisions is not as easy as you think. This is because of our reptilian brain. The logical part of your brain is much smaller than the emotional part. This is the same reason why even smart people fall for ‘get rich quick’ con artists and Ponzi schemes. Without further ado, let’s look at some of the dumb things you can do when you receive a big inheritance.
1) Make more money…fast!
When you receive a large amount of cash or liquid assets, the first thing you think of is what to do with it. They say that you should let your money work for you. Now that you have lots of money, surely they need to be doing something to make you more money? No exactly, perhaps the more important priority should be to make sure you don’t lose it all before thinking about making more.
Be aware of people advising you to make investments that ‘guarantee’ a certain level of return. There is no guarantee when it comes to investing, the risk and return ratio will hold true. Remember that if you choose a ‘safe’ investment, you should not expect it to ‘beat’ the market, but it will protect your money (more likely than not) from the effects of inflation.
2) Become an overnight venture capitalist
So you have a whole heap of cash, suddenly all your long lost cousins start showing up. You may have the temptation to start acting like an investment guru. You may want to help a school friend by giving him cash to fund his startup, or managing a massive investment portfolio yourself.
But without adequate investment experience, your efforts can easily backfire and you can lose it all. The key is to take investing slowly and expect to learn before you earn. Professional portfolio managers take decades to hone in on their skill, it may be better to leverage on their experiences rather than doing it yourself.
3) Bragging about your new found wealth
When you receive a large sum of amount, you may feel the urge to tell people…lots of people. That is not a smart idea. Lotteries winners are the best examples of this. They get lots of unwanted attention and people wanting to know them for all the wrong reasons.
Another way to brag is to suddenly buy flashy and extravagant purchases. The temptation to splash the cash is always there because you can, but it’s definitely smarter to remain low key when you’ve acquired wealth, it will make your life a lot easier, and therefore making it easier to protect your new found wealth.
4) Not taking care of your estate planning
When you receive an inheritance, the natural way of thinking is to decide what to do with the money. But financially savvy people also think about the implications this may have on their estate planning. Making sure this area is sorted will save lots of hassle later on, particular if your affairs are not complicated at the time of inheritance.
5) Not getting your tax situation sorted
In Australia there is no inheritance duty or tax, but that does not necessarily mean that you are tax efficient. You can be caught out if the money you receive is part of a superannuation death benefit. Another useful thing to think about is tax structures, you have super, you may have family trusts, companies and partnerships. It is worth every penny to figure out the optimal strategy when it comes to setting up the right structure, that’ll be the foundation for you to decide what to do with your inherited assets.