Five mistakes to avoid when handling an inheritance
Treated wisely, inheritances can help people meet their long-term goals, from rescuing their retirements to paying off credit card debt to financing family education.
Yet windfalls can turn into mixed blessings when people rush into decisions. Research finds that a third of Americans can expect to receive a significant inheritance. However, many find themselves either spending or giving too much, when developing a careful plan to spend, save and invest would help them meet their most important financial goals.
In the latest contribution to LetsMakeaPlan.org, the CFP Board offers a list of five mistakes experts often see Americans make when they receive an inheritance.
- Spending mindlessly: Some people begin mindless spending on “just a small indulgence.” A series of those kinds of purchases can morph into a spending splurge that might rob people of their ability to reach their overall goals for the inheritance.
- Going it alone: Even Americans who manage their 401(k) plans or prepare their taxes on their own can benefit from help. That’s because a windfall, whether it’s an inheritance or lottery proceeds, is different. Those who receive an inheritance should consider assembling a team, including an estate attorney, an accountant and a CERTIFIED FINANCIAL PLANNER™ professional.
- Making decisions too quickly: Experts say that Americans should avoid making any major life decisions, like selling a house or quitting a job, too early in the process. An inheritance often coincides with loss, and many people aren’t thinking clearly when their emotions run high.
- Becoming paralyzed in the investment process: Sometimes people who receive a lump sum become so worried about “investing at the top,” that they do nothing. They can consider dollar cost averaging (DCA), the investment strategy that divides available money into equal parts and then periodically invests in a diversified portfolio over time.
- Providing for everyone except themselves: People love their kids, friends and charitable organizations – so much so that they sometimes neglect to take care of themselves. Experts advise pushing the pause button. There is plenty of time to provide generous support after a plan is established.
Receiving an inheritance is a great reason to consult a CFP® professional, who can help you tailor a plan that achieves your long-term financial goals.
ABOUT CFP BOARD
The mission of Certified Financial Planner Board of Standards, Inc. is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning. The Board of Directors, in furthering CFP Board’s mission, acts on behalf of the public, CFP® professionals and other stakeholders. CFP Board owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. CFP Board currently authorizes more than 77,000 individuals to use these marks in the U.S.
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