An inheritance might essentially be "found" money, but that doesn't mean it's disposable.
With a large sum of money in your grasp, it's tempting to make hasty decisions that you might regret later. Think about the news stories on lotto winners who find themselves in bankruptcy court within a few short years of cashing that check. It's all too common.
You might think you're not prone to bad hasty decisions, but it's never wrong to stop, think, and consider all of your options first. Before you make any purchases, take on investments, or commit to plans, spend some time evaluating what you want to accomplish with this money. Jason Flurry, president of Legacy Partners Financial Group in Woodstock, Ga., tells CNN Money that you should let yourself dream a little. And dreaming takes time.
If the inheritance is in check form, you might even consider sticking it to the fridge using a magnet while you assess your new financial situation. If it's not in the bank, you can't spend it. With money management software such as Mint.com's suite of products, you can see your full financial situation, dream a little, and consider the best options before you make that deposit.
A budget app lets you keep track of your finances in one place.
Resist the Big Ticket Purchases and Payoffs
With a windfall, it's pretty easy to give in to the temptation of a shopping spree, especially if you can convince yourself that one splurge will barely make a dent in the funds. Don't do it. But what might surprise you is that paying off a large debt immediately also isn't the best choice, depending on how much you've inherited.
Flurry cautions about paying off your house or other large debts without careful consideration. If your home is paid for, but you don't have anything left, that might not be the smartest use of your newfound money. Remember that inheritance taxes may also reduce the dollar amount, leaving you with less than you'd expected.
If you're already using a budget app, chances are you're on track with spending and saving. There's no immediate reason to rush out and buy a new car or even pay off your mortgage. If you don't have an app, it's time to get one and use it to experiment with your budget. Mint.com can show you how your finances would change with your mortgage or other debts paid off. It might be smarter to invest and pay off large debts more slowly in order to enjoy a more comfortable lifestyle on all fronts.
Set up Significant Savings
Even with a chunk of money in the bank, you're still not prepared for the future until you have a few savings accounts. Emergency funds are critical. Use your budgeting software to average your monthly expenses for the past one or two years, and set up an account with at least 6 months expenses. Then leave it alone.
With an emergency savings account, you can weather almost any disaster, such as a job loss, without going broke. If you haven't inherited enough to set aside 6 months of expenses, start with something smaller and build on it as you can. Other savings to consider are retirement, college for the kids, and any other goals that you might have.
Investments should be considered very carefully. If investing is new territory, it might be wise to hire a financial advisor to guide you. There are many things to consider, and one unwise decision could wipe you out.
Where money is concerned, a "lot" is relative. To some, a few thousand dollars is life-changing. For others, several hundred thousand adds security to an already stable future.
The choices that you make won't be the same as anyone else's, because your budget and financial situation is unique. With budgeting software, you can see exactly what you've got, find areas to improve, and make the best choices for you and your family.
If you're not already enjoying the benefits of Mint.com budget software and apps, sign up for your free account today and get started.