It’s much easier to spend money than to save it.
And that’s particularly true for individuals who have received a financial windfall.
Squandering large amounts of money can be easy when the money appears suddenly. And that’s true whether the windfall is $50,000 or $5 million.
Lottery winners provide a textbook case for this phenomenon. The rate of bankruptcy for lottery winners, who file within five years of picking their lucky numbers, is double that of the general population.
Sudden wealth can also be a curse for athletes. According to Sports Illustrated, 78 percent of former National Football League players have filed for bankruptcy or experienced extreme financial difficulties within two years of retiring.
Most Americans aren’t going to strike it big in a lottery or as a professional athlete, but they are far more likely to inherit money from parents or other family members.
If you inherit money, here are some things to consider:
The money isn’t going anywhere, so take your time in deciding what to do with it. Evaluate your short and long-term financial goals before making any financial moves.
Once you inherit money, you can pose a bigger target for people who might want to sue you. Make sure you have proper insurance on your car and home, as well as an umbrella liability policy. Consider buying coverage that equals your net worth.
People who inherit money can experience a wide range of emotions, positive and negative. For some people, inheriting money can lead to feeling guilty, anxious or even angry.
Don’t be surprised if you are contacted by “ambulance chasers” who keep track of obituary notices in hopes of finding clients. Also be leery of well-meaning friends and family members who may approach you with business opportunities or to borrow money.
You should consult with an accountant or other tax advisor to analyze the tax implications of your inheritance.
If you don’t have experience handling significant amounts of money, seek professional help. Look for a fee-only financial advisor, who will be held to a fiduciary standard when providing advice to you.
After receiving an inheritance, you will want to create or update your will and other estate planning documents.