In the introduction of The Old Money Book, I talk about the scenario of two people who receive a financial windfall. One person handles the inheritance poorly. The other person handles the inheritance well.
It may surprise you to know that many people, not just the wealthy, are going to receive an inheritance or some other form of a financial windfall during their lifetime. The sum may not be a million dollars, but it might be $50,000 or $100,000.
Regardless of the amount, how you handle this blessing is critical. It can make the difference between financial independence and squandered opportunity. It can provide the chance for education and travel (handling it responsibly) or condemn someone to regret and misery (handling it poorly). In the most modest of circumstances, it can mean you’re debt free…or owing the tax authorities.
So let’s break down what happens and how many people react when they receive a financial windfall.
If you inherit money from a deceased relative, you’ll probably have a mixed bag of emotions. You’ll feel sadness for the loss of the person. You’ll feel joyful that you’ve received money. You could feel guilty for receiving it if you don’t feel like you’ve ‘earned it’. You could feel like you’ve ‘earned every penny of it’ if you had a turbulent relationship with the deceased. You may feel relief if the money can alleviate some financial pressure. You may feel intoxicated or disoriented if it’s a large sum…and you’ve been living paycheck to paycheck.
A longer term psychological shift may creep in. You may feel like you no longer have anything in common with your friends who are now not as rich as you are. You may not feel like you have anything in common with people who have money…like you do now. You may not know how to dress, where to shop, or how to behave with your New Money. You may purchase gaudy jewelry, cars, or clothes that match up to what you think rich people wear and drive. You may try to be someone else…or simply not the best version of yourself. If you don’t have to work, you may struggle to find your purpose in life or a vocation that provides fulfillment.
Once the euphoria wears off, daily life may seem like a grind. The stuff you bought didn’t make you happy for very long. The money you inherited didn’t solve all your problems and perhaps added a couple more. Tax liabilities and family expectations may have caused a financial hangover. Investment decisions may cause anxiety. Did your old friends change? Or maybe it was you who changed. And can you really trust your new ‘friends’…?
I’ve experienced some of these. I’ve witnessed all of these…and more.
So, I’m going to give you a short list of how to handle a financial windfall with a minimum of discomfort and regret, and a maximum of enjoyment and benefit. If you’re a long time reader of this blog or my books, you may notice a few subtle adjustments I’ve made as time has passed, but the fundamentals remain the same.
First, when you actually receive the cash (I’m assuming it’s cash), give thanks. You’re lucky. Then, put 99% of the money into your savings account. Take 1% of the inheritance and blow it. Go to Las Vegas, rent a suite, gargle champagne, gamble. Buy something you’ve always wanted, like that name brand watch or designer handbag.
Anything legal, as long as it doesn’t cost you more than 1% of the inheritance. That is, to purchase and to own. If you inherit twenty million bucks and have $200,000 as your 1%, the sports car you can buy can cost under $200,000 to purchase, but it will cost more to own, maintain, insure, and put gas in. So you’re over the limit. Best to keep your 1% retail rampage to jewelry, clothes, furniture, electronics, or travel. I have tried to caution people about conspicuous consumption, but I now find it’s better to let them experience buyer’s remorse first hand, but on a smaller scale.
Second, don’t tell your friends you’ve inherited money. If you do tell them, admit to only 10% of what you’ve actually inherited. If you’ve inherited a million, tell them you’ve inherited $100,000. It’s not the whole truth, but it’s ten percent of the truth. And it will save you a lot of heartache and disappointment to keep it to yourself or downplay what’s happened.
Third, go see a certified public accountant in order to assess your tax liabilities. Don’t try to understand tax laws by reading things on the internet. Get professional help immediately.
Fourth, you’ll need an investment advisor who has a list of high net worth individuals as clients and a minimum of ten years experience with a single wealth management firm. If advisors move around too much, it’s a bad sign. What you want to do here is simple: get a large portion of your inheritance out of reach (your reach and greedy relatives’ reach) and into income producing or long term conservative investments. Keep some of your stash in cash, but having your money working for you means it’s not sitting around waiting to be spent.
Note: you’re not going to open a nightclub, invest in a film, or open your own clothing boutique. What you can do is use some free time you now have to write up a business plan for your startup and pitch that to professional investors. When they blow holes in your dream–or respond enthusiastically with some good suggestions–you’ll be much better off than heading into an endeavor unprepared…and risking your own money right out of the gate.
Fifth, look at what this windfall can do for you personally, not just in terms of what you can buy with it. Education is at the top of the list, for you or your children. Travel is second. Charity is third. These are non-material investments that generate long term quality of life. Something to think about.
Sixth, dress low-key. In How To Be A Rich Man…or Woman! I advise readers to adopt a style and stick with it. There’s Old Money Style, which you can find at J Press, Lands End, LL Bean, or The Andover Shop, and with the more traditional offerings of Ralph Lauren. You could also opt for the London Banker look, with conservative suits and outrageously loud shirts and ties from Turnbull and Asser. You could opt for the French Rich look, leaning heavily into fitted, minimalist black ensembles–merino wool sweaters, pantsuits, jeans–and top of the line white shirts. (Visit my friends at Charvet if you really want to peel through that 1% in an afternoon. Waha.)
Finally, most importantly, get back to business and get back to work. Having a purpose in life and a sense of belonging are the two basic ingredients to being happy. These will bring you fulfillment. Money will only give you options.
I’d be very interested to hear some of your experiences with financial windfalls.