The theme this week on the Retirement Quick Tips Podcast is: What to do with a $300,000 inheritance

Today, I’m talking about how to avoid one of the most common pitfalls when receiving an inheritance, which is known as “found money syndrome”.

Found money syndrome is what Forbes writer Bill Keen says can happen when “you come into money you weren’t expecting to receive: gambling winnings, a family inheritance or, in the most extreme case, winning the lottery.”

We are tempted to treat this money differently because it wasn’t something we worked hard to earn and save on our own. It explains why 70% of heirs burn through their inheritance in 3 years. 

It’s tempting to dream up all the things you can do with this windfall - that dream vacation to Europe, a new car, a new house, etc.  And it’s easy to justify this as a once-in-a-lifetime opportunity that you won’t ever have again. 

Also, many people who receive an inheritance are up to their eyeballs in debt, so inheritance funds end up getting used to pay off credit card or other debts, but unfortunately, that often puts a bandaid on the problem, and the debt is likely to return at a future date. 

So if you understand found money syndrome and are determined to use your inheritance funds wisely, what’s next? 

Well actually, you should use it to pay off debt if you have debt. Especially if that is high interest credit card debt, or medical debt, or even car loans and a mortgage. Using an inheritance to rid yourself of ongoing monthly payments and those debts is often a wise choice. 

If you don’t have 3-6 months savings, I would add to your liquid savings, and then invest the rest. 

If and only if you are already on track for a comfortable retirement, would I ever recommend using inheritance funds for spending on anything fancy or fun. And even then I hesitate to recommend that any of it be used for spending now. 

Several years ago, I had a client who passed away. She died with right around $300,000 that her only daughter inherited from her. She and her husband who predeceased her were never wealthy. They lived a very modest lifestyle with modest income. But they were prudent and good savers, and made it to the end of their lives with plenty left over to pass on to their daughter. 

Unfortunately, the daughter burned through the money that took a lifetime to save in about 18 months. She bought a new house, a new car, and kept calling every few months with a new reason why she needed to take money out of her account. 

It was sad to watch and angered me that her parents worked so hard for so many years and she spent it all in less that 2 years, living a lifestyle she couldn’t afford, and very likely lost it all later on since her income couldn’t support upkeep and the ongoing expenses of her new house, car, and other toys. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance