How to manage your inheritance and make sure you buck the trend

First law of inheritance: 

Slow down

In this week’s Torah portion, we read about the five daughters of Tzelofchad, who come to Moshe asking to be allowed to inherit their dead father’s portion in the Land of Israel to perpetuate his name. Moshe immediately brings their claim directly to G-d, who instructs Moshe to accept their claim. They actually receive four parts of the land.

1. Tzelafchad’s regular share, as someone who left Egypt.

2. Tzelafchad’s share in the inheritance from his father, Chefer.

3. Tzelafchad’s second share in the inheritance from his father, Chefer. Tzelafchad was a first-born, and so he received a double share.

4. Tzelafchad had a brother who died in the desert; they received Tzelafchad’s share of that brother’s portion.

The Talmud in Baba Batra uses this story to help learn the laws of inheritance. Who takes precedence over whom, who does not inherit etc… So we know about who is entitled to receive an inheritance, but the question then is what to do when you get the money?

As I mentioned a couple of weeks ago, the whole inheritance issue has become the most common discussion of mine with both soon-to-be and existing clients. I have had numerous discussions recently with individuals who have received an inheritance from the passing of a parent. Often when I start to probe about what they plan to do with the money, saving and investing for the long-term is nowhere close to being the first answer given.

That’s understandable. After all, if we can get that minivan and take the family on vacation, why bother thinking about long-term investing? The answer is that there is a lot of research that shows that individuals who receive sudden inheritances tend to blow through most of the money in a very short time period.

How do heirs use their wealth?

ALESSANDRO MARTINELLO, of Lund University, studied the habits of those that received a sudden inheritance. He wrote, “First, we show that heirs respond to a sudden, salient, and sizable increase in available financial resources by decreasing their saving efforts in the ten years after inheriting, and that the net worth of the heirs converges back towards the path established before parental death. Overall, only about a third of the initial increase in net worth remains nine years after parental death.

“Moreover, the convergence patterns of different wealth components differ substantially. While heirs quickly deplete their excess of liquid assets, financing consumption or investments in real estate and financial instruments, accumulated wealth in housing equity, stocks, bonds, and mutual funds persist longer over time.”

What he and many other researchers point out is that most people who don’t make investing a priority and instead focus on buying things blow through the money in short order. Those who buy property or other financial assets like stocks and bonds keep and grow their money over time.

Don’t get me wrong, there is nothing wrong with spending some of the money on material things, it’s just that you shouldn’t get carried away.

As I have written many times, I often recommend to those who suddenly come into to a large amount of money to wait 2-3 months before making any decisions. I find that this helps the client settle down and become a little more focused and much less impulsive about what to do with the money, and ultimately allows them to accomplish the goals that the money was intended for.

Then make a financial plan. Figure out what it is that you want to do both long and short term with the money. Make sure your goals are realistic based on the amount of money that you received. It may be beneficial to speak with a professional financial adviser as they can help direct you and draw on their experience to make sure you are headed in the right direction.

If you have credit card debt, a bank overdraft, or owe someone money – pay it off and get yourself back on track. Now is the time to correct the years of bad financial habits that have accumulated, and you have an opportunity for a fresh start.

SHOULD YOU pay off the mortgage? If you were to watch some TikTok or Instagram clips you will hear ‘experts’ telling you to keep the mortgage, because you can invest the money and make more than you are paying. That’s great advice until your investment drops 20%. Pay off your mortgage or at the very least pay a chunk of it off. Financially, there is nothing that will make you feel more free and independent than having a paid-for home. Then you can take the amount of money that you were paying monthly and plow that into an investment account every month.

Start investing. Keep it simple. Too often I see people get involved in all kinds of investment schemes which they have no business investing in. Deposits in Ukrainian banks, gold mines in Africa, and oil pipelines are just a sampling of what I have heard. Stick to stocks, bonds and real estate.

Instant gratification is tempting but be smart with the money you inherit. After all, do you really think that the parent who left you the money would have wanted you to blow through it in a few years?

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; aaron@lighthousecapital.co.il