The 5 Most Common Inheritance Mistakes

Welcome back to We're Talking Money. I'm Dustin, wealth advisor here at OmniStar Financial Group, and today we have a short take for you on inheritance planning: the five mistakes that we see people make. This is a topic that's going to become more and more common over the next couple years as we have baby boomers aging and as wealth transfer starts to go from one generation to another.

Now, inheritance will always be life-changing regardless of the amount. It's up to you, making the right decision, whether it's going to change your life forever or if it'll just change your life for a finite amount of time, perhaps just a few years.

Mistake number one: not getting expert help and not having a comprehensive financial plan. I believe this is so important because if you have a financial plan, a comprehensive, a truly comprehensive financial plan, the other mistakes aren't going to happen. So starting here, getting the right help, having the right type of plan. What I mean by that is it needs to incorporate the 10 wealth management elements. Now, this is so important because one element generally will affect another element, and if you're only focused on, say, investment management, then you could be missing other elements that could cause the plan to fall apart.

Mistake number two: spending too much. This is probably the easiest one to make. You've just received all this money that you weren't used to having before. What are the first thoughts that go through your mind? Well, I can finally buy that dream car, I can finally buy that dream house, I can travel the world, take my dream trips. Now, these aren't necessarily bad things, depending on where you were pre-inheritance, how much money you receive, all these different factors. But what can ultimately happen is you look back and you've traveled the world, you've bought the dream cars, you've bought the dream house with cash, and now all of a sudden the inheritance is down to very minimal.

What people don't understand is now you have these houses and then you have these cars. Well, you have to pay insurance and taxes on those houses and cars even after you've already paid cash on them. So now your cash flow is actually in a worse spot than it was pre-inherited. So be careful not to spend too much, make wise decisions, and don't just blow it off. But it's very easy to do, one of the common mistakes that we see.

Mistake number three: making decisions too quick. Now, this is one where when someone comes to us, we give them the advice: take your time, think about what you're doing, because sometimes the first thought that comes to mind, it probably isn't going to be the right one. For example, one thing we hear a lot is, "I want to pay off my mortgage." That sounds great. That seems like it could be a really, really wise decision, so why don't we just crunch the numbers and just look at it?

So let's assume you have a current mortgage of five hundred thousand dollars. You're gonna be at a five percent interest rate, 30 years. Your monthly payment is going to be 2 710 a month. So how much interest are we actually paying? Let's take that 2 710 per month and we'll times about 30 years. So the total is going to be 975 771 on your 500 000 mortgage. That means you paid about 475 000 in interest. So initially, paying off the mortgage, not having that payment anymore, not paying that 475 000 in interest, it seemed like a really good idea.

But when we think about in terms of planning, in terms of forever money, now let's say that we just invest the money. So 500 000, let's say we grow it at eight percent for the same 30-year time period. How much money you have now? You have five million thirty one thousand three hundred and twenty eight dollars after 30 years. Major difference.

Another major difference is what it looks like long term in terms of paying off debt versus having an asset that will be there and continue to grow. A mortgage is on your balance sheet for a finite amount of time, where when we save money, that's going to be forever ever. So 30 years, we have this balance and we're going to be paying some interest. Yes, it's painful, but after 30 years it's gone. Versus if we save that money, now all of a sudden we have five million dollars. But imagine what five million dollars will do for you when it's continued to grow and grow and grow and grow. And if you don't spend through it, it's going to go to your next generation. They don't spend through it, it's gonna go to the next generation. This is forever money.

Mistake number four: keeping too much of the money in cash. When you receive money from someone that you love, an inheritance, well, the last thing that you want to do is make a bad decision. So sometimes what we see is that people will say, "You know what, I'm not going to invest the money. The stock market is just too risky." And let me tell you something: whenever you try to time the stock market, you're probably going to lose. You may get lucky once or twice, may work out, but it's very difficult to do consistently over a long period of time.

Now, emotions are so key when we talk about financial planning. This is why we need to refer to step number one: having a plan and consulting an expert, having someone help you. You don't want to make a bad decision, and it could be paralysis by analysis, because there are a lot of options in a lot of places where you can put the money. If you have a professional help you, they don't have any emotion tied to the money. You're going to be able to see very clearly, okay, this is the right avenue to take.

Mistake number five: giving it to everyone but yourself. This may not seem that obvious, and it may seem like this probably isn't going to happen, but it happens more than you think. You receive all this money and you want to give to charity, you want to give to the church, you want to give over here, you want to give to your friends. And look, I'm not saying that's ever a bad thing. We should always give, but make sure you're doing it in the context of the financial plan. Make sure you're not giving too much, because what happens sometimes is you start giving to everyone and there's not enough left over for you to really change your life, where the person who gave you the money, that was their goal in the first place.

So running it through the financial plan is very key, because what it's going to tell you is, all right, we can give x amount per year and still make the plan work. So then we know the dollar amount. Now we can say, okay, where do we want it? Where do we want to put it? You really want to dig deep on charities. You want to find out, okay, where's the money going? How much are the executives getting paid? Who are the executives? What is the mission? Where is everything really happening within the organization? Because you want to make sure that if you're giving your inheritance to a charity, to any cause, that the money is actually going there. Again, taking your time, making the right decision, and doing the right thing for your overall financial plan.

Inheritance is life-changing money. It's going to be up to you whether it's for a few short years or whether it's for generations to come. If you receive an inheritance and you don't know where to start, please reach out. Our team is here to help. The last place that you want to be is looking back years from now and saying, "Gosh, I really wish I would have done that different."

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