Have you inherited a large amount of money from a loved one? While the sudden influx of money is a good thing, it's also intrinsically linked to the loss of your friend or family member. This can make managing an inheritance particularly challenging. Some people whittle away their inheritances too soon while others never figure out how to spend it in fulfilling ways.
One easy way to avoid these pitfalls is to create a guiding method for saving and spending. Here are three approaches that may work for you.
1. Modifying the Jar Method
Some financial experts suggest that parents teach children financial management with their own money by using the "Jar Method." The child makes three jars: saving, spending, and giving. Money they receive is placed into one of the three jars and then used only for that purpose. While your own jars (or buckets) of money are much larger, this simple methodology can help you with big-picture management.
2. Honoring Their Goals for You
Ask yourself what the giver would want you to do with their assets. What goals for you would they have had in mind for this money? A parent or grandparent, for instance, may have valued higher education, travel, charity, or self-investment. Then, consider how you could translate those values into your own goals.
The actual inheritance is, of course, your own money now. So you should temper this thinking with an assessment of your own personal values and goals. Perhaps you know that higher education is not for you, even though your parents wanted you to get a degree. But was their goal for higher education self-improvement or a better paycheck? You could still honor their interests by finding other ways to achieve either goal.
3. Earmarking Earned and Unearned Income
One of the most common mistakes people make with inheritances is not valuing this unearned income in the same way they would value their own hard-earned income. Fortunately, you can combat this tendency by using the unearned inheritance money for larger, forward-thinking goals and life necessities (like housing, transportation, or education). Then, use your own earned income for fun, frivolity, and adventure. This way, you can still enjoy the windfall but you're less likely to waste it on less meaningful experiences.
No matter what approach you want to take with your inheritance, coming up with guiding principles before you begin to spend it is vital. They will ensure that not only do you receive the full benefit of the money but you also feel good about how you use it. Learn more by contacting a wealth management financial planner today.