Baby boomers are planning to pass down $68 trillion to their children, NBC reported. While not everyone will receive an inheritance, quite a few Gen Xers, millennials and Gen Zers will. And per USA Today, 68% of millennials and Gen Zers specifically have received or are planning to receive an inheritance of about $320,000, on average.
While receiving a financial windfall — expected or otherwise — can be exciting, it’s important to use that money wisely and build wealth. For some millennials, it can be all too tempting to go wild and spend money they perhaps should have saved, invested or used to pay down debt.
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However, this can be a mistake. If you’re a millennial who’s set to receive an inheritance, these are the four biggest mistakes not to make with your money.
Spending Too Quickly or Too Much
One of the biggest mistakes anyone can make with an inheritance is spending it too quickly or on things that aren’t as important as they initially seem.
“We see people inherit large sums of money only to spend it rapidly on luxury items, vacations and home renovations. Without a clear plan, they deplete a significant portion of the inheritance within months, leaving little for long-term financial goals,” said Andrew Latham, CFP, content director at SuperMoney.
Instead of overspending, Latham suggested waiting at least six (but maybe even 12) months before making any major purchases. During this time, put your inheritance in a secure, interest-bearing account. Once the “cooling-off” period ends, you can then purchase what you wanted — with a clear idea of how much to spend and whether it’s still worth it for you. This can help ensure your inheritance lasts a long time.
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Not Having a Budget or Plan
Without a clear budget and financial plan, it’s all too easy to spend an inheritance and regret it later. That’s why financial experts suggest creating one before doing anything major with that money.
“The biggest mistake people make when receiving an inheritance is not doing a financial plan and budgeting,” said Aviva Pinto, CDFA, CDS, managing director at Wealthspire Advisors. “They find themselves with a windfall and buy big-ticket items thinking they are ‘rich’ without looking at the ramifications.”
Pinto gave the example of someone going out and purchasing a bigger house without considering the higher cost of maintaining it. They often won’t calculate things like higher property taxes or utility bills. Not only that, but people don’t often factor in inflation and whether they’ll actually be able to afford their purchase in the long run, which can lead to financial hardship or stress later on.
“They will spend [their inheritance] down quickly when their means and lifestyle should have indicated it would have been better to save and invest the inheritance,” Pinto said.
Forgetting About Their Debts
According to Experian, the average millennial has $125,047 in debt across all major loan types, including mortgages, credit cards, personal loans and auto loans. While it might make sense in some cases to pay off low-interest debts over time, it doesn’t make as much sense to leave the high-interest ones.
But instead of paying off high-interest debts like credit cards or other loans that continually accrue interest, many millennials will first invest in things like the stock market or make large purchases, Latham pointed out.
“The missed opportunity here is that paying off debt with high interest — such as 20% on credit cards — offers guaranteed savings, whereas investments come with risks,” he said. “The smart approach is to first eliminate high-interest debts, which instantly improves cash flow and reduces financial stress, before investing or spending the inheritance.”
Investing Without a Clear Plan or Strategy
Investing is a well-known strategy for building long-term financial security. Unfortunately, many millennials who receive an inheritance will invest without a clear plan.
“We see cases where individuals place their entire inheritance into a single stock or speculative investment without considering diversification or risk tolerance,” Latham said. “When markets shift, they can lose a substantial portion of their wealth.”
Fortunately, there are ways to mitigate this risk and get more from your investments. Simply invest in a well-diversified portfolio that matches both your risk tolerance and you long-term goals.
“Diversifying across stocks, bonds and other asset classes protects against market volatility and increases the chances of growing and preserving the inheritance,” Latham said.
What To Do With a New Inheritance
Whether you’re a millennial or not, there are a few things you can do to avoid spending your inheritance or investing in risky ventures that don’t pan out.
“If you’re about to receive or have recently inherited wealth, I recommend you follow the simple but effective ‘pause, plan and prioritize’ strategy. First, avoid any big spending decisions for at least six to 12 months. Use this time to assess your financial situation, pay off high-interest debt and work to set up a good investment strategy,” Latham said.
Once you’ve taken some time to make a plan, it’s important to look long term to set yourself up for financial success. “Focus on long-term goals — like retirement, education or property — while ensuring your money is diversified and tax-efficient,” he said. “Stay disciplined, seek professional guidance if needed and remember to enjoy yourself while still putting your windfall to work building a lasting financial security.”
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This article originally appeared on GOBankingRates.com: 4 Biggest Mistakes Millennials Are Making With Their New Inheritance
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