Protect Your Wealth: The 5 Biggest Inheritance Mistakes to Avoid

Welcome back to We're Talking Money. I'm Dustin Hocken, wealth advisor, OmniStar Financial Group. Lately we've had multiple clients that are receiving large inheritances, and this is only going to become more common as Baby Boomers transition to retirement and ultimately their wealth passes to the next generation.

Inheritance will change your life. Now, it depends on you on how long it'll be: life-changing generational wealth, or just for the next few years. Stay tuned as we talk about the top five inheritance mistakes that you don't want to make.

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Mistake number one: not having a financial plan and not working with a professional. This one, in my opinion, is number one, because if you work with a competent financial professional, none of the other mistakes should happen. You must have a comprehensive financial plan looking at all 10 Elements of wealth management. It's not just about investment management or one element, because every element affects another. When each of these elements are considered in your financial plan, you know that you won't be making a mistake that you'll regret later.

Mistake number two may be the most obvious of the bunch: spending too much. Now, you just receive this large inheritance. That's more money than you've ever had in your entire life. What are your first thoughts? Wow, now I can finally buy that dream car, I can buy that dream house, or I can take those trips that I've always wanted to take. Now, none of these are necessarily a bad thing, depending on your situation and how much money you receive.

It's very easy to talk yourself into thinking that this money will last forever, and before you know it, you've got a couple cars, you paid cash for your house, you've traveled, and now all of a sudden your inheritance is down to a minimal amount. What people also don't consider is when you buy those large houses or you buy those nice cars, you're going to have insurance and taxes on those things forever, whether you have the inheritance or not. So a lot of times people will make these large purchases, then they run out of money, and they have to sell these assets because they can't afford the taxes, insurance. Be careful not to put yourself in a position where your cash flow or your lifestyle gets out of whack. Those are two elements of wealth management, and again, all 10 elements need to be considered.

Mistake number three: making decisions too quick. You just receive this large inheritance, and one of the first things we hear most often is, wow, I'm gonna pay off my house. Now, when you think about this, it may seem like a really good idea, but when you start to look at the other options around, or what that money can do for you long term, paying off your house might not be the best idea.

Let's take a look at some math and we'll work through this together. So for your home, we're going to use a 500 000 mortgage. We're going to assume that it's an eight percent mortgage, the interest rates going up, and it's going to be a 30-year mortgage. Now, that monthly payment is going to be three thousand seven hundred dollars a month. Take this payment over 30 years, and this 500 000 house would have cost you 1.3 million dollars. That means by paying off the mortgage, you just saved yourself 800 000 in interest. Now, that sounds pretty good, right?

Well, let's take the same amount of money invested and let's look at the opportunity cost over the same 30 years. Let's take the same 500 000 and let's assume that we can earn eight percent interest over a thirty year period. Well, that money compounded over 30 years is going to be a little over five million dollars.

A mortgage is on your balance sheet for a finite amount of time, whether it's a 15-year or a 30-year mortgage. When you have this type of money that can be compounded, it's forever money, or it's what we would consider generational wealth. It'll be enough to pass from generation to generation to generation, but that's only if the right decisions are made and decisions aren't made too quick. Slow down, you have time. Run it through the financial plan, be methodical, and make the right decision.

Mistake number four: keeping too much money in cash. This mistake is very common, because when you receive an inheritance, you become attached to the money and you don't want to lose it. You may view the stock market as, gosh, that's just too risky, or the stock market right now is too high, I'm not going to invest my money right now. And what you'll be telling yourself is, you know what, I'm going to wait for the market to drop and then I'm going to put my inheritance in. Well, what happens is over a couple year period, we've missed out on some appreciation, and we probably still haven't invested much of the money. It's next to impossible to time the stock market.

Let's refer back to our number one mistake. Have a plan, work with the professional, start to invest the money over time. Have a dollar cost averaging strategy where you push the money in, whether it's monthly or quarterly or semi-annually, until you have a nice, well diversified portfolio.

Lastly, mistake number five: giving to everyone but yourself. This one may seem pretty obvious, but it happens more than you think. Now, it's not a bad thing to give to charity or people in need. I'm certainly not saying that. But what sometimes gets lost when you receive a large inheritance is you think the money will last forever, and you don't really realize how hard it is to build up that type of wealth. It takes a lot of good decisions over a long period of time to generate wealth. If you haven't seen this process over years and years, you may think that it wasn't really that difficult at all. Again, we would go back to number three here and tell you to slow down, take a breath, and run all of these decisions through your financial plan with the financial professional to make sure that it makes sense for you.

Thanks for watching, and please comment below. I'd love to hear your thoughts. Are there any mistakes that you can think of that maybe I forgot about? Remember, inheritance is life-changing money, but it's up to you whether it's going to change your life just for a couple years or whether it's going to be generational wealth. If you do receive an inheritance, you don't know where to turn, please reach out to us. The professionals at OmniStar Financial Group are happy to help and happy to have that conversation. Be sure to like, share, comment and subscribe. We appreciate you, and we'll talk to you soon.

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