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Inheriting the wind may seem like a dream come true, but it can cause a lot of worry and guilt, and it can even leave you financially worse off.
For example, Mike and Noel, both 34 and recently married, burned through a $171,000 inheritance in about a year. You can imagine how they leave feeling.
“We’re very complicated,” Noel told Ramit Sethi in an episode of his podcast. I will teach you how to be rich (1).
And it’s not like they’re in dire straits. Mike earns a six-figure salary and supports Noel while she finishes law school — but they’ve always struggled with debt and money management, even before the inheritance.
While they used some of the inheritance to pay off the debt, they quickly amassed more: Noel spent $30,000 on furniture, $10,000 on clothes and $10,000 on a trip to Mexico. Mike bought hair transplants and Pokemon cards, which he considered “investments”.
Now, they have $30,000 in assets, another $30,000 in investments and zero savings after spending the inheritance, but they also have $244,000 in debt, leaving them with a negative net worth of close to -$200,000.
Because of this, Noelle said she regrets treating the money like “guilt-free spending”, while Mike said he feels anxious and stressed, leading to stress and fights over finances.
While there are plenty of issues to unpack—from Mike’s anxiety around money to Noel’s addiction issues—their situation shows how quickly the wind can disappear without clear priorities, a budget, and an investment plan. It also highlights the risks of lifestyle and compulsive spending.
If you are in line for a significant financial loss, here are some tips to end that legacy.
Even if you’re not in line for multigenerational wealth, large inheritances may be more common than you think.
According to a recent report by Cerulli Associates, by 2048, Gen X and millennials are expected to inherit $124 trillion in wealth – which is referred to as America’s wealth transfer – with Gen X expected to acquire the largest share of wealth in the next decade (2).
However, the problem is that some heirs treat the inheritance like a regular income rather than a long-term investment.
Part of the reason may be psychological. Noel, for example, inherited money from his father, with whom he had a difficult relationship. “He was an alcoholic and a drug addict and wasn’t really in my life, and so I had a lot of guilt (about inheriting his wealth),” she told Seti.
And she is not alone. A Harris Poll report found that inheritance comes with complex emotions: a third of young recipients (33%) feel pressured to manage large or more complex assets, and a similar share (34%) worry about mismanagement of these assets (3).
According to the same report, while most heirs feel grateful and relieved by their newfound financial security, 20% feel stressed, 18% anxious and 15% feel guilty.
This phenomenon is sometimes called sudden wealth syndrome, a psychological condition that affects people who acquire sudden wealth – through an inheritance, lottery, legal settlement or other windfall. Reasons include a sense of detachment from one’s former life or an intense fear of losing it all.
These feelings can lead to decision paralysis or poor financial choices.
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In short, the legacy of the wind can be overwhelming. While a large inheritance can help you pay off debt and invest for the future, it can also a lot Encouragement to go through spending.
Friends and family may also offer unsolicited advice—without you asking for it.
That’s why having a plan—tailored to your unique circumstances—can help you protect your legacy. Without one, even a six-figure windfall can quickly evaporate.
FINRA also recommends holding off on making any big moves—like quitting your job or making a big purchase—for the first six to 12 months (4). Consider this a cooling off period.
Finally, it may be wise to seek guidance from a registered financial advisor, insurance agent and tax professional, especially when windfall is critical.
Finding an expert near you is now easier than ever with Advisor.com.
Here’s how it works: Answer a few basic questions about yourself and your financial situation, and Advisor.com’s AI-powered technology will match you with a FINRA/SEC-registered expert best suited to your needs.
The best part? This process is completely free. And since Advisor.com’s listings include fiduciaries, they are legally obligated to act in your best interests.
Still, hiring a financial advisor can be a long-term commitment. That’s why Advisor.com allows you to set up a free, no-obligation consultation with your match to see if they’re a good fit for you.
Consulting an expert is not the only thing you can do.
During this time, you can immediately set aside money for taxes on your windfall. And if you don’t already have one, create an emergency fund that covers three to six months of income.
To do this, you can keep the money in a safe account, such as a high-yield savings account or a certificate of deposit (CD). If the amount is large, try to spread it over multiple accounts to stay within federal insurance limits (4).
A high-yield account, such as a Wealthfront cash account, can be a great place to grow your emergency funds, offering competitive interest rates and easy access to your cash when you need it.
The Wealthfront Cash Account can provide a base variable APY of 3.30%, but new customers can earn a 0.75% boost in their first three months for a total APY of 4.05% on your uninvested cash provided by program banks. That’s nearly ten times the national savings rate, according to the FDIC’s February report.
With no minimum balance or account fees, as well as 24/7 withdrawals and free domestic wire transfers, you can be sure your funds remain accessible at all times. Additionally, Wealthfront cash account balances up to $8 million are FDIC-insured through program banks.
Once you have some advice and an emergency fund in place, you can start thinking about what to do with the rest of the cash.
The first option to consider isn’t really a “sexy” one – paying off your debts. While it’s not as exciting as going out and buying your dream car, it’s a smart choice if you have high-interest debt like credit cards or personal loans that charge 20% to 25% interest.
Paying off your debts first “gives you an immediate guaranteed return that’s nearly impossible to beat with any investment strategy,” according to Citi (5).
One way to do this is to consolidate your existing high-interest debt through a personal loan, ideally at a lower interest rate. This can help you save thousands of dollars in interest payments over the life of each high-interest loan.
If this appeals to you, there is now a way that you can check the rates offered by different lenders on debt consolidation loans through credit in just two minutes.
That way, instead of being stuck with monthly payments, you’ll have a predictable payment to manage each month.
Reliable online marketing allows you to shop around for low interest rates with just a few clicks. You can get personal loans at rates as low as 6.25% APR.
Even better? The process is quick and easy, completely free and does not affect your credit score.
And Credible offers a Best Rate Guarantee — if you settle for a lower rate than you already qualify for, Credible will give you a $200 gift card.
Of course, most people will want to invest some of their inheritance – and it’s hard to argue with that logic.
But Siti cautions against over-zealous investment.
“Boring index funds and target-date funds are perfect for most of your investment allocation,” he says, giving you broad market exposure without needing you to “become a stock-picking expert overnight (5).”
You can stay ahead of the market by paying extra for the work. Investing even small amounts in index funds consistently can add up over time – thanks to the power of compound interest.
For example, investing just $30 every week for 20 years can grow to $93,000 – if it’s 10% compounded annually. This assumption is not far-fetched – the compound annual growth rate (CAGR) of the S&P 500 index over the past 33 years is 10.8% (6).
In other words, you don’t have to reinvent the wheel for financial gain. You can start small.
This is where platforms like Acorns come in. Acorns allows you to turn your spare change from an everyday purchase into an investment opportunity.
It works like this: Your cards and Acorns will link each purchase to the nearest dollar, investing the difference – your spare change – in a diversified portfolio managed by experts from leading investment companies such as Vanguard and BlackRock. That way, your daily shopping can start working for you behind the scenes.
The best part? You can get a $20 bonus investment when you sign up with Acorn today.
Assuming you’ve already invested a portion of your inheritance, the next step is figuring out how to finance your higher living expenses.
You can start by thinking about your financial goals. Are you putting away enough for retirement? Buying a home? Reducing work hours or retiring early? Starting a business, going back to school or traveling?
While these are all great options, you may want to keep lifestyle inflation in mind at the same time. For example, a windfall does not justify buying a mansion or a luxury car. Factor in ongoing costs such as property taxes, insurance and maintenance to ensure sustainability.
And that’s where you might want to try going back to personal finance basics: Citi’s Conscious Spending Plan recommends 50% to 60% for necessities, 10% for investments, 5% to 10% for savings, and another 20% to 35% for guilt-free spending (5). This can also be applied to wind.
By tracking structured spending like this, you can have some fun with your money — without breaking the bank after a year.
If you’re looking for a way to structure your spending, you can consider creating a custom budget to track where your money is going at any time with Monarch Money.
Monarch Money keeps all your finances under one roof, from your bank statements to your investments. Once you connect your accounts — including investments and real estate — you’ll be able to see every transaction through a clean, searchable list.
This way, you can find any unexpected expenses, such as unwanted subscriptions, quickly and seamlessly. You can also receive custom alerts about upcoming bills, allowing you to stay on top of your bills and reduce the chances of missing a payment or incurring late fees.
Monarch Money helps you plan your spending beyond just one month, as well as save for bigger goals along the way.
You can get a seven-day free trial to see if it’s right for you. And if you like the platform, you can get 50% off your first year with code WISE50.
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@ramitsethi (1); Cerulli Associates (2); Harris Poll (3); FINRA (4); I will teach you to be rich (5); Deviant (6)
This article provides information only and should not be used as advice. It is provided without warranty of any kind.
