What to Do With an Inheritance
06 Mar, 2022
I first published this blog post back in June 2017. I’ve dusted it off and rewritten it today purely because of many conversations I’ve had over the last six months with people who have inherited large sums of money. It felt timely to rewrite the post and create a resource for others.
Have you ever received an inheritance?
In each of the 60 episodes of my podcast, I ask the question, “if you were given $10,000 right now, what would you do”? I picked that amount because, in my mind, it is enough to be significant ($1,000 just doesn’t make people sit up and listen), but the thought of a sudden and unexpected $10,000 does.
It is possibly not so surprising that there was a heck of a lot of hypothetical holidays being booked with this $10K. Thankfully this was because they had been paying attention to their finances before receiving this fictional $10,000. They were secure enough to spend some or all of the windfall.
Jonny and I had two windfalls that have made a real impact on our lives in the 20 plus years we have been together (proving the point that “coming into money” is rare). The first amount was about $20,000 from the sale of shares in a business, and given we had a mortgage; the cash went straight on it. All of it. Because our mortgage was “revolving credit”, that money could immediately be put against our debt. This made a substantial impact on bringing the loan closer to zero, thus saving us oodles in interest payments and allowing us to pay it back so much faster. There was never any doubt that we would use the money to pay down debt and buy our freedom from the bank.
When we got our second windfall of about $50,000 (from a business sale), we were mortgage-free but right in the midst of the Christchurch earthquakes, and we were awaiting insurance payouts (which took years), there was job uncertainty, and we had decided to move away from Christchurch. That money was used to increase our emergency fund substantially, plus some was used sparingly for day to day living. It allowed us to be more financially resilient in the middle of a crisis.
I don’t recall celebrating with champagne when either lump-sum showed up. Still, I remember getting enormous satisfaction from seeing our debt shrink and our financial future feeling more secure. Seeing it come into our bank account never prompted a round of extravagant spending; instead, we absorbed it into our financial plans. We also added money to our regular investments.
Via my Phone A Friend conversations and emails I receive, I’ve come into contact with several people who have come into money in a more unfortunate way; via the death of a much-loved spouse or family member. That in itself is hard enough to get your head around. Add the realisation that this person loved them enough to bequeath them a substantial sum of money; the pressure comes on. In many cases, particularly with the death of a spouse who handled all of the finances, the remaining partner must now take complete control of the family finances for the very first time - whether they are ready for it or not.
I’ve noticed that if, like Jonny and I, you already have the financial foundation built for your whānau, then inherited, gifted, won, or sale of asset money just gets added to the stage of the process you are at. But suppose you have never handled your family finances or have always been in a poor financial situation due to lesser financial education. In that case, it can be incredibly overwhelming to work out what to do.
An old gold miner I know once told me, “Ruth, everyone gets a few lucky chances in life, big pivotal points that if you handle them well, will set you up”. Financial windfalls, expected or otherwise, are just those lucky breaks he was talking about. I know it’s grim to turn the death of a family member into a blessing, but honestly, if they didn’t think you worthy, they would never have left you money.
Receiving money due to the death of someone you love is an awful way to come into money.
So, if you are the recipient, make it count and make that person proud of the decisions you make with their money.
Unless it is Lotto you have won, which does come as a surprise, when you come into some money either via business or family, generally you know it is on its way. My advice on what to do with it would be this:
Accept that it’s time to educate yourself about money, starting from the very basics.
Realise that there is no rush. Kiwis seem to have this thing about “making money work for you”, and that this is URGENT. If your net worth was $50,000 on Monday, and on Friday it became $1,050,000, you have already made a shed load of money. So, feel free to park it in a bank account while you make the right decision, even if that takes six months to a year.
During that time, work your way through my checklist below.
1. NET WORTH
Start a spreadsheet on your computer where you vow on the 1st of the month to write down what you own and what you owe. Make this a lifetime habit, that way you will always know whether your wealth is growing or shrinking.
2. BUDGET
You would think that having suddenly become a millionaire, you would never need to budget again. Not so. If anything, you need to double down on learning to budget. Why? Because before this inheritance, you may or may not have budgeted, BUT I bet you stuck to a plan of sorts. You knew what was coming in each month and what was going out. Now more than ever, you need to track your income and expenses. Particularly your costs, because when your bank account looks so flush, it’s far too easy just to blow money.
I’m not saying you can’t have a spend up, but it needs to be a rational and controlled decision to spend. Create sinking funds with your bank for things you are saving up for; nothing changes in that regard. You keep cash in the bank for something you will be doing short term; coming into money just means you get to fill up these buckets more quickly. Don’t squander the money or think of it as “play money”, you can be sure that the person who left it to you never thought of it that way, so neither should you.
3. EMERGENCY FUND
Because of your budget, you now know what you spend each month. Even if your monthly expenses have increased since your newfound wealth, you need to have six months of that amount set aside in a separate account marked “emergency fund”. Emergencies still happen to rich people, so don’t pull money out of longer-term investments to fix short term dramas.
4. KIWISAVER
Steadily invest in your KiwiSaver throughout your life. Keep paying into it as you always have, perhaps even increase your contributions if you have been under-investing in the past (which far too many Kiwis have). It will form part of your long term financial plan to know you will gain access to ANOTHER pot of money when you turn 65. And let’s face it, it’s a store of cash that you can’t get your hands on. Think of it as insurance just in case you blow your inheritance.
5. BECOME DEBT FREE
Now that you live on a budget, have an emergency fund, and are paying into your KiwiSaver, it’s time to kill off all your debt. For every single person I’ve spoken to, there is absolutely no reason to keep debt around anymore. In every instance, the cash they now have far exceeds their debt. So, pay off your mortgage, your credit cards, your car loan. And then turn around and cut off those lending facilities.
Before you try to tell me that you should keep a mortgage because debt is cheap and you could invest that money and earn more, I disagree. How much money do you need? Now it’s a matter of preserving and growing the money that has been so graciously left to you, not using that as leverage to 10x it.
6. INVEST
Because all of your short and medium money goals are taken care of, you have “no need” for the rest of the money; it all heads into investments. Whether you choose to buy property, invest in your business, or invest it into the share market, your plan should be to draw an income from these investments in the years ahead. You need to invest in assets that return you an income for that to happen. You will undoubtedly receive a lot of unsolicited advice around what you could do with this money but now is not the time to be the main backer behind a friend's dodgy business idea. This brings me to my next point.
7. WHEN TO SEEK FINANCIAL ADVICE
If I inherited $1,000,000 today, I am sure that I would be OK to invest it, in keeping with my current strategy. I’ve spent years thinking hard about our financial future and would feel comfortable doing so. However, if the sum were that big, even I would ask a professional.
Most times, I speak with someone who has come into money; I suggest they spend a couple of thousand dollars on an independent fee-only authorised financial adviser. Why? Because so much of this is new to so many, seeking someone to help you plan your near and long term future is a massive weight off your shoulders.
Even if you feel you are on the right track, I think it’s good practice to bounce your investment strategy off a professional. They don’t tell you what to do, but they point out the implications of each decision, and then they formulate a plan that suits your goals. They guide you through it. They don’t ever touch your money, but they sit in the background providing guidance. To many, it’s a huge comfort to know that they are making good decisions.
Final points:
We have all heard of people who had their Great Grandma's dosh well and truly spent because they thought an inheritance was imminent, only to have her sitting at the head of the Christmas table again at Christmas. Go, Grandma! Don’t spend a cent until you have it in your bank account.
Wills can be contested. An inheritance may be split more ways than you had bargained for.
When you do receive a chunk of cash, for whatever reason, put it in a high-interest account (yeah, I know they are hard to come by) while you work out your options. There is no rush to do anything. If it sits there for six months while you work out the right path to take, then so be it.
Don’t fritter it away! The money may not be the result of your hard work, but it’s the result of someone else's financial diligence over a long period. Respect that.
Since I wrote my original blog post five years ago, we have had two smaller windfalls of $10,000 in total. Both were a surprise; one came from an elderly relative, the other a generous and unexpected gift.
On both occasions, I ran down my list:
I updated our NET WORTH.
We didn’t need the money in our monthly BUDGET.
Our EMERGENCY FUND was full.
Our KIWISAVERS were current.
We were DEBT FREE too.
Which only left INVESTING.
We may have bought a bottle of wine to celebrate, but we invested the remainder in our ETF funds. We still have every single penny of it today. But it has grown due to the dividends we have reinvested and the increase in the investment itself. We intend to hand this money down to the next generation. It’s truly the gift that keeps on giving, and when the time comes to draw down on our assets, we will feel genuinely thankful to those that thought so highly of us that they shared their wealth.
It’s not how much money you make, but how much you keep, how hard it works for you, and how many generations you keep it for - Robert Kiyosaki
