What’s the Best Way to Manage an Inheritance or Other Lump Sum of Money?

It’s never easy to lose a family member or loved one. The emotional toll this can take on you is significant. If that person left you an inheritance, the situation can become even more difficult to deal with.

Having someone you love pass away and leave you a lump sum of money is not quite the same as stumbling upon a twenty-dollar bill on the ground. You may have a lot of grief, confusion, or even anger that you feel about your loss -- and you also have a lot of financial decisions to make now.

The problem? You should never make financial decisions based on emotion, and this is where a lot of people who receive an inheritance go wrong and squander this gifted wealth.

Even if you receive some sort of lump sum payout under happier circumstances, you run the same risks. After all, excitement and joy are still emotions that can sway you from making rational financial choices.

So what should you do -- or not do -- if you find yourself in this situation? How do you sort out your newly inherited assets?


Don’t Rush to Take Action 

You might feel a sense of urgency if you receive an inheritance or a lump sum of money. It can burn a hole in your pocket! But this sense of urgency is probably unfounded. Very rarely do you need to do anything immediately

So don’t rush to any decisions -- especially when it comes to using up your newfound wealth. I have unfortunately seen people run out to buy a new car or a new house in cash because they can, or they hurry to pay off an existing loan or mortgage because they want to be debt free. 

But this could be a huge, irreversible mistake. Acting on impulse is almost never a good idea when it comes to money. So take a big breath, take a step back, and let yourself feel whatever you’re feeling… but don’t act on those feelings.  

Give yourself time and space to process things. Once you’re feeling more grounded, you can look at what to do next.


Do Get Professional Support 

There’s a reason successful people are not loners; they have teams of mentors, workers, advisors, coaches, and staff that surround them. 

Smart people know they need support, expert guidance, and independent, objective perspectives to help them reach the best decisions. You should do the same if you want to enjoy the same success. 

If you find yourself with an unexpected lump sum of money, consider sitting down with a financial planner who can help you sort through all the must-do actions (like transferring assets officially into your name) and help you figure out what you’d most like to do next (based on your needs, goals, and priorities). 

But don’t just hire any person who calls themselves an advisor! Get educated so you can ensure you hire the right professional who will put your best interests ahead of everything else. That means you’re looking for a fee-only, fiduciary, CFP. 

You can learn more about finding the right financial advisor for you here.


Don’t Leave Cash Sitting in a Bank Account 

Letting cash sit around means racking up big opportunity costs, because it could be earning money elsewhere. Not only will you not earn interest or a return on your cash in a checking account, but you’ll also be more apt to spend it. 

It’s just sitting there, ready and waiting -- and it probably feels different from money you earned through your paycheck. So remove the temptation and at the very least put this sum into a high-yield savings account. 

If the total amount is over $250,000, you need to split the total sum up at different accounts with different banks to ensure you have complete FDIC insurance protection on your money. You can read my article here on how to choose the best savings account for you


Do Think About the Future 

Once you actually have inherited assets or a lump sum payout in your possession and have given yourself time to process your emotions, you need to make a plan for that money and give it a job.

What is this money for? Do you have immediate pressing needs you need to address? Do you have big goals to fund? Are you looking to secure your own financial freedom -- or create an even bigger legacy so this money can continue to support future generations of your family? 

There aren’t really any wrong answers here, so long as you focus on your values and what you want your life to look like. It’s probably not a wise long-term move to seek immediate gratification and run out to buy that sports car you always wanted. 

(But hey, it could make sense in some situations! This is why it’s important to work with a planner who can help you sort your goals and priorities)  

Talk about your goals. Get clear on what’s important to you. Take the time to consider the impact of your choices with this money, and how big purchases now may impact you in the long run so you can make the best possible financial choices with this new wealth you received.