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Inheriting a windfall may seem like a dream come true, but it can cause tremendous anxiety and guilt, and it could even leave you financially worse off.

Mike and Noel, both 34 and recently married, burned through a $171,000 inheritance in about a year.

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“We are super screwed,” Noel told Ramit Sethi on an episode of his podcast, I Will Teach You To Be Rich (1). After spending the inheritance, they still have $30,000 in assets and another $30,000 in investments — but they are also $244,000 in debt.

While they used some of the inheritance to pay off debt, the couple spent $30,000 on furniture, $10,000 on clothes and $10,000 on a trip to Mexico. They also financed a hair transplant for Mike and paid for his collection of Pokémon cards.

Their situation demonstrates how quickly a windfall can disappear without clear priorities, budgeting and an investment plan — and underscores the risks of lifestyle creep and impulsive spending.

As millennials, their story is especially important, as they are also part of the younger generations of Americans set to inherit unprecedented amounts of wealth.

The Great Wealth Transfer

Through 2048, Gen Xers and millennials are projected to inherit $124 trillion in assets — what’s referred to as America’s Great Wealth Transfer — with Gen X expected to receive the largest share of assets over the next decade, according to the latest Cerulli Edge report (2).

While inheriting such a bounty seems like a positive thing, a report by The Harris Poll found that inheritances come with complex emotions: A third (33%) of younger recipients feel stress managing larger or more complex assets, and a similar share (34%) worries about mismanaging those assets (3).

This phenomenon is sometimes called Sudden Wealth Syndrome (SWS), a psychological condition affecting people who suddenly acquire wealth — through an inheritance, lottery, legal settlement or other windfall. Causes can include feeling disconnected from one’s previous life or an intense fear of losing it all.

These feelings can lead to decision paralysis and poor financial choices. That’s why it’s so important to know how to deal with it before it happens.

Read More: Robert Kiyosaki warned of a ‘Greater Depression’ — with millions of Americans going poor. Was he right?

Making the most of an inheritance

A large inheritance can help you pay off debt and invest for the future, but it can be very tempting to go on a spending spree. For this reason, having a plan in place — one tailored to your specific circumstances — can go a long way in helping you make your inheritance last.

FINRA recommends holding off on any big moves — like quitting your job or making a major purchase — for the first six to 12 months (4). Consider this a cooling-off period.

And when you do receive your inheritance, consider parking it in a high-yield savings account before you develop a plan for how to use it wisely. If the sum is large, spread it across multiple accounts to stay within federal insurance limits.

In the meantime, one of your priorities might be establishing a full emergency fund, with six months of expenses at the ready. That way, you have something to fall back on if your financial situation suddenly turns sour.

Bump up your savings

A high-yield account like a Wealthfront Cash Account can be a great place to grow your uninvested cash, offering both competitive interest rates and easy access to your money when you need it.

A Wealthfront Cash Account currently offers a base APY of 3.30% through program banks, and new clients can get an extra 0.75% boost during their first three months on up to $150,000 for a total variable APY of 4.05%.

That’s ten times the national deposit savings rate, according to the FDIC’s March report.

Additionally, Wealthfront is offering new clients who enable direct deposit ($1,000/mo minimum) to their Cash Account and open and fund a new investment account an additional 0.25% APY increase with no expiration date or balance limit, meaning your APY could be as high as 4.30%.

With no minimum balances or account fees, as well as 24/7 withdrawals and free domestic wire transfers, your funds remain accessible at all times. Plus, you get access to up to $8M FDIC Insurance eligibility through program banks.

Prioritizing your inheritance funds

If you have high-interest debt — like credit cards or personal loans charging 20% to 25% interest — pay it off first, since that “gives you an immediate guaranteed return that’s almost impossible to beat through any investment strategy,” according to Sethi’s website (5).

But you may want to hold off on paying back low-interest loans, like mortgages, since Sethi says that money “might generate significantly better returns if invested in diversified index funds over time.”

Moreover, if you have a large portfolio, you could consider diversifying your investments to protect yourself from a market downturn. Assuming you have a 401(k) or IRA with stock market investments, you can consider branching out into other asset classes to stabilize your new wealth.

Keeping a portion of your portfolio in gold is considered a classic hedge against inflation and stock market instability. For instance, you can invest in gold and reap significant tax advantages by opening a gold IRA with the help of Priority Gold.

Gold IRAs allow investors to hold physical gold or gold-related assets within a retirement account, which combines the tax advantages of an IRA with the protective benefits of investing in gold, making it an attractive option for those looking to potentially hedge against stock market volatility.

To learn more, you can get a free information guide that includes details on how to get up to $10,000 in free silver on qualifying purchases.

Investing in real estate

For the baby boomer generation, investing in real estate proved to be a significant gain in their net worth. Realtor.com reports that this generation holds $19 trillion in real estate (6), far outpacing any other age group.

However, even if you’ve inherited enough to buy a new home, you don’t need to blow all that cash in order to reap the benefits of investing in real estate. Platforms like Arrived let you buy stakes in rental properties, earn monthly dividends and skip the responsibilities of property management.

Backed by world-class investors like Jeff Bezos, Arrived’s easy-to-use platform offers SEC-qualified investments such as rental homes and vacation rentals for as little as $100.

Their flexible investment options allow both accredited and non-accredited investors to benefit from this inflation-hedging asset class with ease. You start by browsing vetted properties, then simply select a property and choose the number of shares to buy.

Plus, for a limited time, when you open an account and add $1,000 or more, Arrived will credit your account with a 1% match.

Diversifying your real estate portfolio

However, if you have a substantial inheritance and a minimum of $100,000 to put into the real estate portion of your portfolio, there are other real estate opportunities available that also leave the property management to someone else.

Accredited investors can tap into this opportunity through platforms such as Lightstone DIRECT, which gives accredited investors access to single-asset multifamily and industrial deals.

Lightstone DIRECT’s direct-to-investor model ensures a high degree of alignment between individual investors and a vertically-integrated, institutional owner-operator — a sophisticated and streamlined option for individual investors looking to diversify into private-market real estate.

With Lightstone DIRECT, accredited individuals can access the same multifamily and industrial assets Lightstone pursues with its own capital, with minimum investments starting at $100,000.

Setting goals for growing your wealth

From there, consider your financial goals. Are you putting away enough for retirement? Buying a house? Reducing work hours or retiring early? Starting a business, going back to school or traveling?

Also consider lifestyle inflation. For example, inheriting a windfall doesn’t necessarily justify buying a mansion or luxury car. Factor in ongoing costs, such as property taxes, insurance and maintenance, to ensure sustainability.

You may want to consider topping up your 401(k) and IRA, then putting money aside for your goals. For short-term goals, like a wedding, putting your cash in a high-yield savings account, money market account or CDs means your money is more accessible. However, for longer-term goals, consider stocks, bonds or alternative assets.

That being said, Sethi warns against getting too fancy with investments. “Boring index funds and target-date funds are perfect for most of your investment allocation,” giving you broad market exposure without requiring you “to become a stock-picking expert overnight (5).”

Sethi’s conscious spending plan recommends putting aside 50% to 60% for needs, 10% for investments, 5% to 10% for savings and another 20% to 35% for guilt-free spending. This, too, can be applied to a windfall.

That way, you can still have a bit of fun with your money — without going broke a year later.

Getting professional advice

While inheriting a windfall can be overwhelming — and friends and family may offer unsolicited advice — it may be wise to seek guidance from a registered financial advisor, insurance agent or tax professional, especially when the windfall is substantial.

A financial advisor can assess your current finances and your future goals to map out a number of potential scenarios for using your inherited money.

But hiring an advisor can be a lifelong commitment, which might make or break your retirement. That’s why finding reliable advisors is crucial.

That’s where Advisor.com can come in — the platform that connects you with an expert in your area for free.

Advisor.com does the heavy lifting for you, vetting advisors based on track record, client ratios and regulatory background. Plus, their network comprises fiduciaries, meaning that they are legally required to act in your best interests.

Just enter a few details about your finances and goals, and Advisor.com’s AI-powered matching tool will connect you with a qualified expert best-suited for your needs based on your unique financial goals and preferences.

Finding the right advisor isn’t always easy — there’s no one-size-fits-all solution. That’s why Advisor.com lets you set up a free initial consultation, with no obligation to hire, to see if they’re the right fit for you.

— With files from Vawn Himmelsbach

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

@ramitsethi (1); Cerulli Associates (2); The Harris Poll (3); Financial Industry Regulatory Authority (4); I Will Teach You to Be Rich (5); Realtor.com (6)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.