Ramit Sethi
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Inheriting a windfall may seem like a dream come true, but it can cause tremendous anxiety and guilt — and potentially leave you worse off financially than you were before.
Mike and Noel, both 34 and recently married, burned through a US$171,000 (C$233,000) inheritance in about a year. “We are super screwed,” Noel told Ramit Sethi on an episode of I Will Teach You To Be Rich (1).
Mike makes a six-figure salary and is currently supporting Noel as she finishes law school. But they’ve always struggled to manage their money, even before inheriting a windfall.
Now that the inheritance is gone, they have just US$30,000 (C$41,000) in assets and another US$30,000 in investments, but zero savings. They’re also US$244,000 (C$332,000) in debt, which works out to a negative net worth of -US$184,000 (-C$250,000).
“Looking back, I regret the way I treated the money,” Noel told Sethi, but at the time she saw it as a gift, which prompted her to treat it like “guilt-free spending.” Mike, on the other hand, “has never been more nervous, and we’ve never had as many fights. He was really stressed out about where the money was going to go.”
While they used some of the money to pay off debt, they then proceeded to rack up more debt: Noel spent US$30,000 (C$41,000) on furniture at Crate & Barrel, US$10,000 (C$14,000) on clothes and US$10,000 on a trip to Mexico. Mike spent money on a hair transplant and Pokémon cards, which he justified as an “investment.”
While there are a lot of problems to unpack here — from Mike’s anxiety around money to Noel’s addiction issues — their situation demonstrates how quickly a windfall can disappear through a mix of unclear priorities, lifestyle creep and lack of an investment plan.
A 2024 ISS Market Intelligence report estimates that the wealth transfer in Canada between 2023 and 2032 will reach $1.275 trillion (2).
But some heirs treat an inheritance like income instead of capital. Without a strategy for that capital, even a six-figure windfall can quickly evaporate.
Part of the reason could be psychological. Noel, for example, inherited the money from her dad, with whom she didn’t have a great relationship. “He was an alcoholic and addict and was really not in my life, and so I had a lot of guilt” about inheriting his assets, she told Sethi.
A report by The Harris Poll found that inheritances come with complicated emotions. A third (33%) of younger generations say they “feel stress from managing more (or more complex) assets, while a similar number (34%) are concerned about mismanaging assets (3).”
And while inheritors are generally grateful and feel a sense of relief from their newfound financial security, one in five (20%) feel the “weight of pressure,” while 18% feel anxiety and 15% feel guilt, according to the poll.
There’s a term for this: Sudden Wealth Syndrome (SDS). This is a psychological condition that can occur with people who suddenly become wealthy (say, from an inheritance, lottery winnings, legal settlement or other form of windfall). There could be several reasons behind this, from feeling disconnected from their former life to an extreme fear of losing it all (4). It can lead to paralysis or bad decision-making.
Read more: Keeping over this amount of cash in your bank account is a serious mistake — how much do you have stashed in there?
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. That’s why having a plan in place — one tailored to your specific circumstances — can go a long way in helping you make your inheritance last.
First, you should hold off on any big moves — like quitting your job or making a major purchase — for the first six to 12 months. Consider it a cooling-off period. During this time, you could park your cash assets at a bank or credit union in a high-interest savings account.
If it’s a large sum, you may want to spread those assets across different accounts to ensure you’re protected under the Canada Deposit Insurance Corporation (CDIC), which insures deposits at member financial institutions of up to $100,000 per depositor, per deposit category and per institution (5).
However, you should immediately put money aside to pay for estate taxes that the person you inherited the money from must pay on their final tax return. This can get complicated, so you may want to seek the advice of a tax professional. If you don’t already have one, you should also consider putting three to six months’ worth of income into an emergency fund.
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If you have high-interest debt — like credit cards or personal loans charging you 20% to 25% in interest — paying those off should be a priority, since it “gives you an immediate guaranteed return that’s almost impossible to beat through any investment strategy,” according to Sethi (6).
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.”
From there, think about your financial goals. Are you putting away enough money for retirement? Do you want to buy a house? Do you want to cut back your hours at work or take early retirement? Do you want to start a business or go back to school? Do you want to take a year off and travel the world?
Also be cognizant of lifestyle inflation. Just because you inherit a windfall doesn’t mean you should go out and buy a sprawling mansion with a Porsche in the driveway. Consider the ongoing costs of property tax, insurance and maintenance, and whether you can keep those up over time.
Lastly, you may want to consider topping up your RRSPs and TFSAs, and then putting money aside for your ambitions in life. For short-term goals, like a wedding, consider a high-interest savings account, money market fund or guaranteed investment certificate (GIC), so your money is more accessible. For longer-term goals, you may want to consider stocks, bonds or alternative assets.
But 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 (7).”
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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 (8). This, too, can be applied to a windfall, so you can still have a bit of fun with your money without going broke a year later.
While inheriting a windfall can be overwhelming — and no doubt friends and family will give you plenty of unsolicited advice — it may be a good idea to seek professional counsel from a registered financial advisor, insurance agent and tax accountant, especially if you’ve come into a rather large windfall.
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Youtube (1); Insurance Portal (2); The Harris Poll (3); Calda Clinig (4); CDIC (5); I Will Teach You to be Rich (6, 7, 8)
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