You inherited a chunk of change. Now what?
Think hard and long before spending it, financial experts say
In a four-part series, USA TODAY takes a look at financial challenges that can emerge at various stages in your life. In this installment, Susan Rose details how she beat odds that say that most people quickly spend, or lose, inheritances.
What would you do if you came into a large sum of money? And what if that windfall was associated with the loss of a loved one?
Susan Rose had to answer both of those questions, and the way she handled the newfound cash provides a lesson that many people can learn from as they deal with the aftermath of the passing of relatives or other life events that lead to a sudden windfall.
Rose, a professor from Elmhurst, Ill., received a significant inheritance from her father’s estate. Though her father passed away in 1993, the money didn’t come all at once.
“We got a lump sum when my dad died, and then he also left us a piece of land that (we) sold a little later,” she says.
Another portion of the inheritance came when Rose’s mother died eight years ago. For Rose, blowing the money on a quick thrill was never an option.
“When you realize how hard folks in my parents’ generation work for what they had, you feel more of an obligation,” she says. “I had to be respectful of their sacrifice.”
While receiving a large windfall can seem like an end to money troubles, many people end up back in a financial hole. In fact, research from Ohio State University found that, on average, people who receive inheritances quickly spend or lose half of it. Rose was determined to defy the odds.
Here’s how she turned her inheritance into a wealthier future for herself and others: Consult a professional. It’s one thing to manage a salary and a monthly budget. But Rose knew she didn’t have the expertise necessary to make the most of a large windfall of cash. “I’m an
academic. My husband’s a musician. Why would we try to do something that we were not trained to do?” Rose sought help by hiring a financial adviser. Maintain your current
lifestyle. Since Rose and her husband were making enough to sustain their daily lifestyle, they didn’t use the extra money to live more lavishly.
Instead, they invested the money so it could continue to grow and fund their biggest priorities. When money got tight, they reined in their spending. Rose’s mantra: “This money is off to the side for investment. Live with the rest of it.” Start with your needs. Neither Rose nor her husband Robert had been huge earners up to that point, so they decided to focus first on their retirement. “We were saving all along, but I don’t think to the level we thought we really wanted to be,” Rose says. “This gave us a boost that we needed.” Prioritize your dreams. Once their retirement account was adequately funded, “we could think about some of those other goals,” she says. They purchased and refurbished a vacation home in Minnesota. They rehabbed the house over a period of several years, which helped Rose to be more conscious of her financial choices and allowed the money that was invested to grow. Spread the wealth. It was important to Rose that the money also benefit someone else. She funded 529 college-savings plans for two godchildren and set up two scholarships at local universities.
“That money was a gift from my father who worked very, very hard. It helped me in my life. I thought, ‘How do I think about helping some other folks move up the ladder as well?’ ”
Sharon Oberlander, managing director and wealth management adviser at Merrill Lynch, has helped Rose manage her money for the past 20 years. Oberlander offers more advice for those who receive a large sum of money: Do nothing at first. Receiving a sudden windfall can be an emotional experience. “Emotion leads to flawed thinking,” Oberlander warns. Instead of spending impulsively, think through what you want to do with the money over the long term.
Create a plan. We’ve all heard stories of lottery winners who burned through their winnings in a couple of years. “It’s because they don’t sit down and do the planning,” Oberlander says. Figure out how long you need the money to last and what you want the money to do. Then create a strategy to make that happen. Target your most pressing financial need. Are your retirement savings lacking? Do you have three to six months of emergency savings? Are you overwhelmed by debt? Use the money to tackle your biggest money problem. Then, create your money bucket list.
“There are many different ways a lump sum of money could help somebody,” Oberlander says.