The first thing to do is absolutely nothing.
Turns out, grandma was hoarding millions.
Or grandpa. Or maybe your old ex who forgot to update their will, or your aunt who you had a close relationship with, or you’re a participant in any number of scenarios where huge inheritances suddenly come out of nowhere. Or, you won the lottery.
The point is, you’ve come into a “life-changing” amount of money—a specifically murky description, as it can mean something else for everything—and you had no idea it was coming. So, what do you do?
The first, and most important thing, is to do absolutely nothing.
"HOLD IT AND DON'T DO A THING FOR THREE MONTHS!!!” is what the finance blogger J. Money adamantly recommends. “Then once it soaks in and you've had time to let the feelings and ideas settle, start taking action.”
We’ve all seen stories of the instant-rich being bombarded with requests from every other third cousin or long-forgotten high school chums looking for interest-free loans or “investment capital” for their “back-scratcher with a mp3 player” idea or whatever. (There’s a famous “statistic” that 70% of lottery winners end up bankrupt in a few years; a statistic that is utter bullshit, but that doesn’t mean people with new windfalls don’t get harassed by friends and family for portions of said windfall.) By putting a bold and strict moratorium on doing anything with your new money for a period of time, you can avoid this initial onslaught of leeches.
Why you need to be extra careful
But outside forces aren’t the only problems you have to ward off. There’s also that devil on your shoulder, pointing out that luxury car you’ve been pining over, or conjuring dreams of a boating trip around the world, or stupidly giving you the idea that trying a burger that’s been idiotically infused with gold flakes is necessary.
Getting a surprise inheritance can make you especially susceptible to doing something dumb with the cash. “It’s found money, so we think about it differently than money we earn,” says Paul Golden from the National Endowment for Financial Education, a non-profit that educates the public on financial decisions. “It comes with a misconception that you’re never going to have to worry about money again. But it’s the opposite. You’re going to have to worry more than ever before because there’s a lot of decisions to make.”
You also need to be aware of how your emotions can cloud your judgment. “People have a really hard time going through the grief process and the emotional swings that come with managing this money,” Golden says. “There might be a dynamic in the family that is rough to manage. Resentment and anger come into play.”
What to do after doing nothing
When you're ready to take some steps with the money, it helps to have a plan. If you're not sure what to do, a certified financial planner can help you compose your personal spending Wish List and figure out how far your inheritance can go to get you there. But you can also figure this out most of this on your own too.
The great things about inheritance money is that it isn't considered income, so you typically won't have to pay taxes on it. And unless the estate you're getting a chunk of is worth more than five million dollars or so, there is no federal estate tax applied to the haul either. Some states do charge their own estate or inheritance taxes, however. Here's a handy map from NerdWallet that shows which ones do.
When it comes to actually spending the money, a good start is to look at any high-interest credit card debt you have and pay that off first. If you don't already have an emergency fund, be sure to set some of your windfall aside to cover things like your roommate stiffing you for the last month's rent or your friend's destination wedding that cost about three times more than expected.
Next think about your long term goals and pick investments that will help you get there. Anything you want to spend on in the next five years—say, to buy a house—should be in a fairly liquid account that doesn't have a lot of risk. It may be as simple as putting the money in a high-interest savings account. You do not want to invest that money in the stock market as you could lose a big chunk of it if the Dow takes a dive right before you need the funds.
As for the really long term, you may want to put more money in an your individual retirement account (if you have one) or open one up (if you don't). There are contribution caps on those of $5,500 annually, so if you have more to invest you could put your money in a taxable account and pick some mutual funds. Some smart, long-term investment options include a low-fee index fund that mirrors the U.S. stock market, an international stock fund, and possibly a bond fund to balance out the stock funds, which tend to have bigger swings in annual returns.
Once your own spending moratorium is complete, and you've got your investment plan in order, go ahead and spend a few grand on a trip, or something nice for your mom. You’ve earned it, and more than that, you’ve made your secretly-rich granny proud. Lastly, find a way to spend at least some of the money on something fun.