What to do with an inheritance...
What to do with an inheritance
Millennials are expected to inherit over 3.5 trillion dollars over the next decade as baby boomers transfer their wealth.
Deciding how to use an inheritance wisely can be overwhelming.
When a loved one passes away finances are likely the last thing on your mind. However, if that loved one chooses to leave you an inheritance, it’s worth taking the time to consider your options for investing and growing those funds in a way that will honour their memory.
The benefit an inheritance can provide for you & your family can be life changing. By maximising & taking advantage of the opportunity you have received can set you up for life.
An inheritance can support you in getting closer to achieving financial freedom, which allows you to take control of your time.
Financially Free & Taking Control Of Your Time
In the past six months, we have had an enormous amount of people coming through our Newcastle & Lake Macquarie Financial Planning business that are looking to level up and become financially free. The main reason people are seeking financial freedom is actually to free up time.
They no longer want to:
be dictated to on where to be, when to be there, what to wear or how much they can earn
work in a job that they don’t enjoy or aren’t passionate about, because they need to feed their family and pay their mortgage.
they don’t want to ask for permission to take 28 days off a year (four weeks annual leave) to spend with their loved ones or spend doing what they love
have someone else raise their children
not be able to provide all the opportunities for their children. Whether that is sport, education, music or travel
So effectively, people are seeking financial advice from a Newcastle & Lake Macquarie Financial Planning Adviser to take control of their time.
CRAZY!
I would never have thought that as a financial planner that I could support people in getting time.
Deciding What To Do With An Inheritance?
An inheritance can provide that financial boost needed to get financially ahead in life and bring forward your goals.
Generally, people receive an inheritance in the form of liquid assets such as cash or shares, illiquid assets such as a property, or as sentimental possessions that have no monetary value.
When deciding what to do with an inheritance what should you be considering first?
Where to invest your inheritance?
How you are going to spend your inheritance?
you should first consider your financial goals and what you would like to achieve in the short, medium and long-term. From there, you can take steps to determine how the inheritance can be used to help achieve them.
When we speak to people seeking financial advice, the first thing we start with is their relationship with money.
Your Relationship With Money
As when someone receives an inheritance we want to ensure they take advantage of the opportunity.
We partnering with people who are seeking to maximise their inheritance, we start with your money story.
We start by looking at your past, the lessons & values your grandparents/parents past on to you about money, the language that was used around money growing up, and your financial thermostat.
Without the understanding & acknowledgement your relationship with money, it can become difficult to manage large sums of money.
Your Goals
“To know where you are going, you must first know your destination.”
Your goals provide you with clarity & direction.
In doing so, you provide your money with the structure & framework it requires to grow & flow.
When our Lake Macquarie Financial Planners support people with setting goals, we start with what level of finance you are looking to level up to.
Financial Security
Financial Independence
Financial Freedom
We then dive deeper into your individual goals to help you level up and the rationale or purpose behind these goals.
By understanding your purpose or why behind each of your goals, it provides you with the drive & motivation to achieve them.
When setting your goals, ensure you are using the SMART framework. That being, make sure each goal is specific, measurable, attainable, relevant, and is time based. In addition, we like to add the consequences of not achieving your goals. How will this affect you, your family & loved ones if you do not achieve your goals.
We have found that by using the SMART framework and consequences, the probability of you achieving your goals rises significantly.
Your individual goals will establish the framework & influence how you choose to use your inheritance.
There are numerous tax effective ways a person can receive an inheritance to minimise tax payable, which again are dependent on individual circumstances and should be considered. More broadly, some options for using an inheritance include:
Paying down debts - providing you with financial security
Invest the money - purchase property/ invest in shares
Boost your super - Making additional contributions to superannuation
Reduce your tax - tax management is an essential part of protecting your inheritance
Set up your legacy - whether that is setting up your kids with education, university, house deposit, or giving back
Treat yourself - there is nothing wrong with allocating a proportion of the inheritance to treat yourself. Once your financial plan is in place, you will know how much money is available for you to spend on yourself.
Where To Invest Your Inheritance
The way you choose to use an inheritance is individual to you, right down to the way you may choose to invest the funds.
How you invest your inheritance will be a by-product of your goals.
A diversified investment approach should be guided by your appetite for understanding and taking investment risk.
At the end of the day, it all comes back to the individual goals and then implementing an investment strategy which will give them the best chance of achieving them.
We see all too often people “seeking” advice asking should they invest in Zip or AfterPay.
Our follow up question is, “what is the purpose of the investment? “
Their response is typically “to make money”.
Generally, these types of “investors” are the first ones out when their is any signs of trouble or turbulence.
Investing to make money is not as effective as, I wish to invest for 10 years making regular monthly contributions, to build up funds to purchase my first home, which will provide my family & I with shelter & security. I want to have a $70,000 deposit, starting with a $10,000 investment and investing $300 per month. Based on an average 7% return, it is estimated that you will have $70,000 in 10 years time for a home deposit.
You now have a clear timeframe, understand the risk you need or are willing to take to achieve your goals. A balanced portfolio with 50% invested in defensive orientated assets (cash/fixed interest) and 50% invested in growth assets (aust. shares/ international shares/property) averages 7.26% per annum over the past 20 years.
Therefore, this investment may be “boring” and not the hit of excitement you were after, but growing your money should not be exciting.
Investing all your money into one particular stock (Zip/Afterpay) is extremely risky and can be fraught with danger.
Investing shouldn’t feel like a trip to Vegas.
Managing emotions when making financial decisions
As well as helping you to establish your goals and a strategy to help achieve them, our Lake Macquarie financial planning adviser can also serve as a source of accountability, assisting you to implement the decisions you’ve made at what can be a challenging time.
One of the struggles we see with people who have just received an inheritance is the challenge to remain objective and to try and minimise emotion in the decision making process.
People can sometimes see receiving an inheritance as a burden – a financial ‘windfall’ that they don’t want to make a mistake with,. This in-turn can lead to a lot of stress and even end up with the funds lying dormant for a long time because the individual has ‘frozen’.
If you’re feeling overwhelmed about deciding what to do with an inheritance, consult with your loved ones or our Newcastle & Lake Macquarie financial planning advisers who can help guide you through the decision-making process.
Examples
We have seen a number of people seek advice for inheritance they received and we wanted to share parts of their experiences to help you.
Couple in their early twenties
We had a couple in their early twenties seek advice on their inheritance.
They were in their early twenties, with a small baby and another one on the way.
They were living pay cheque to pay cheque, with only one income.
Their household income was $60,000 per annum and they wanted to move out of their parents home to have their own place for their family to grow.
They received an inheritance of $600,000.
We supported them with a financial plan that would have enabled them to purchase a home, repay their mortgage over ten years, and have additional income to support their ever growing family.
However, they started receiving advice from family members, who were not financially free.
The advice they received from their family was the fees are too high.
Paying life insurance from your superannuation is a waste of your money.
You don’t need anyone to support you, we can help you manage the money.
The couple cancelled our advice service and wished to run things themselves.
They came back to us 12 months later…
They have a boat, motor bike, three cars, a large mortgage and a stuck.
Two of their cars have broken down with an estimated bill of $6,000 to get back on the road.
They were begging on Facebook for someone to lend them a car so they can get to work as they cannot afford to fix their cars.
They sought our support again, however given their financial situation their were some difficult conversations we had to have to get them back on track.
Learnings from this example:
Understanding your money-story, relationship with money, and your financial thermostat would have supported this couple significantly in taking advantage of the opportunity they received through an inheritance. However, more importantly understanding who you should be listening to and seeking advice from is also important.
Couple in their mid thirties
We recently meet with a couple in their mid thirties.
They have three kids and recently received an inheritance.
The couple received $400,000 which they used $100,000 to repay they mortgage and have $300,000 in a term deposit earning 1% per annum.
They don’t want to make a mistake with the inheritance they received. This has lead to a lot of stress and has ended up with the funds lying dormant for the past 18 months in a term deposit.
Learnings from this example:
With limited financial literacy & education investing may seem risky.
As anything you do not know or understand seems risky. It is the fear of the unknown.
So seeking advice from an expert can provide you with the confidence & peace of mind that you are using your inheritance to achieve your goals. And ultimately achieve the financial freedom you are seeking.
Couple in their early fifties
We have a couple in their early fifties that are set to receive an inheritance of $300,000 in the next 6-12 months.
They have a mortgage of $150,000 and a number of things they want to do.
This couple want to spend $100k renovating their home, purchase a new car $50k.
They also want to take their family on a holiday $10k, boost their super $100k, and invest $100k in the stock market to grow their wealth and replace their employment income.
This couple have mentioned on numerous occasions that they have not come from much and have never had to manage this kind of money. They are a bit overwhelmed with the entire situation.
This couple is yet engage with our services and seek a personalised financial plan.
We receive regular calls from this couple about various things, including should we be salary sacrificing, getting a loan or a lease to purchase a new car, upsize their home, should they invest in ZIP or afterpay and how they can replace their employment income.
Learnings from this example:
Understand your money-story and your financial thermostat.
They have already spent more then their inheritance - identifying that their financial thermostat is currently set a $0.
In addition, by setting out your goals and financial plan, you have the framework for your money to flow & grow. In addition, the financial plan will give you the confidence & clarity that your money is being used to achieve your goals and the peace of mind that you have a financial expert overseeing things so you do not make large financial mistakes.
Further sources:
https://www.investopedia.com/articles/personal-finance/092515/i-just-inherited-money-now-what.asp
https://www.firstalliancecu.com/blog/what-to-do-and-not-do-with-an-inheritance
https://www.cnbc.com/2020/01/16/receiving-an-inheritance-four-things-experts-say-you-should-know.html