How to Not Waste an Inheritance

An inheritance may make you instantly wealthy, but it could disappear just as quickly.

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You've always dreamed of winning the lottery. But rich Uncle Larry just left you the next best thing – a large inheritance. Yet now that you've had time to think about it, you realize you've never been very good with money.

So how can you protect the money you inherit? Here are some tips to avoid wasting sudden wealth.

Prepare before you receive the money. Don't get your hands on that big check ASAP. If you do, you'll end up not knowing what to do with it. A better idea is to line up a professional adviser and devise a strategy before you take possession of the money. Know how much is going to each bank and investment account, and have a plan for when and how the money will be invested.

Manage your taxes. Tax law is written so that wealthy people pay most of the taxes and also have the largest number of deductions available to them. That means you need to keep taxes in mind on most financial decisions. Since tax laws are complicated, find a good CPA to navigate them.

Invest the inheritance. You can't just park a large inheritance in your local bank and forget about it. The best way to protect your money is to invest in a variety of funds. An experienced investment professional can help determine the best ones.

Don't spend the principal. When you live paycheck to paycheck, a big inheritance seems like so much money that you could never spend it all. That's a lie. You can spend it all, and it's much easier than you think. The best way to protect it is to only spend the income it generates, never the principal.

Stay away from special toys. You'll likely want to buy something fancy: a big boat or a fast car. Avoid the temptation. Big ticket items can consume your inheritance quickly.

Beware of relatives and friends who want your help. If people know you have money they'll come to you when they're in financial stress. Unless your inheritance reaches in the millions, you won't have enough for all your family members and friends. If you can help (and want to), limit it to your regular income. Do not give them any of the principal.

Select business partners carefully. Friends and relatives may pitch several investment and business ideas to you. Unless you're a business professional, you won't know how good or bad they are. Let your investment adviser evaluate them. If he or she says "no," you'll be able to blame it on the adviser.

Be a wise philanthropist. You'll want to give to charity, but make sure the ones you choose actually do the work they promise. Reputable charities limit how much they spend on executive salaries and fundraising. Have your CPA check out any that you plan to give more than a few dollars.

Don't lose sight of who you are. Sudden wealth has a tendency to change people. It's easy to let money define you. That's a quick way to consume an inheritance and lose your wealth.

Gary Foreman is a former financial planner who founded The Dollar Stretcher website and newsletters. The site features thousands of articles on how to save your valuable time and money including an article on protecting sudden wealth.