Avoid the Pitfalls of Inheritance - McCarthy Group Avoid the Pitfalls of Inheritance - McCarthy Group

At some point in your life you will probably give or receive inheritance. Both present unique opportunities & challenges for giving or making a significant amount of money. But what are the pitfalls of inheritance that you are likely to fall into? How can you avoid them?

To begin, we thought we would discuss our own view on inheritance, as it possibly goes against what many believe. By incorporating inheritance as part of a financial plan, you throw yourself at the mercy of the person bequeathing that inheritance to you. We all have arguments with our family members, and sometimes they can spiral a little bit out of control. But what if that was to happen before the unfortunate passing of that individual? You could be at a complete loss.

If you were to be relying on inheritance as part of a financial plan, we believe it should only happen if you are completely certain that you are going to receive that money in the future.

Chess and last will concept

It’s really just a case of planning for the worst case scenario, but for many it probably won’t be an issue

Having said that, let’s discuss how you can make your inheritance work for you.

Receiving inheritance can be a very big deal. Whether you receive a cash sum, property, shares, or any other kind of asset. Suddenly receiving a large amount of money may radically change the way you live. Sadly, inheritance can be a slippery slope for many. Sometimes, the more money we have the more we are willing to spend. So when a large amount of money suddenly enters our world, many of us start thinking of things we can buy.

Unsurprisingly, this is likely not the best way to make the most of the opportunity presented to you. Think about someone who wins the lottery. It’s almost cliché at this point, but almost a third of the time, lottery winners will go bankrupt in the future. The reason for this is that most lottery winners spend a fortune within the first few months of winning, which primes them for how they should be buying into the future. While many lottery winners will reduce the amount of stuff they buy after a few months, they will still on average spend more than they did before winning.

businessman standing with pockets turned inside out on gray background

Which ultimately leads to empty pockets!

This process is often exactly the same for inheritance.

Spending more when you come across money primes you for continuing that behaviour for as long as you can. Take for example getting a new job that pays $10,000 more a year. Most of the time when people are promoted they spend a similar amount per year to the increase they gained from getting promoted. This could be avoided by continuing your current spending behaviour as much as you can, putting the extra cash you have gained into investments.

Even though this process is the most obvious solution to making some real savings, it is the one that is conducted the least in Australia, and globally. The Commonwealth Bank has suggested that the average monthly amount that people save is $427, or just under $100 a week. This might sound alright, but the average income in Australia is $61,925 or just under $1200 a week. Does it really cost $1100 a week to maintain your life?

Or are you paying a bit too much for your coffee?

Or are you paying a bit too much for your coffee?

So why is the average saving amount so low?

Because it’s so easy to spend money, but so hard to save it! It just doesn’t feel rewarding enough when you put money into the bank or an investment. But thinking about your own money, what is the purpose of making it? Is it to be able to buy nice cars and clothes, or is to be able to secure a future that you feel comfortable in?

So why fall into the trap?

Inheritance is an opportunity to make a change. If you are a spender rather than a saver, have a think about your future. If you retired today, how long could you support yourself? How far away from retirement are you? These are the important things you need to think about when you consider what to do with inheritance, and your income for that matter.

If you need help creating a will, we are in contact with world class lawyers who can help you set up the best options for the most competitive prices. On top of that, if you are ever in need of great financial planning advice, be sure to get in touch with our Money Coaches, who’ll be happy to help you out!

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