Ramit Sethi <\/p>\n
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Some or all links contained within this article are paid links.<\/p>\n
Inheriting a windfall may seem like a dream come true, but it can cause tremendous anxiety and guilt \u2014 and potentially leave you worse off financially than you were before.<\/p>\n
Mike and Noel, both 34 and recently married, burned through a US$171,000 (C$233,000) inheritance in about a year. \u201cWe are super screwed,\u201d Noel told Ramit Sethi on an episode of I Will Teach You To Be Rich (1).<\/p>\n
Mike makes a six-figure salary and is currently supporting Noel as she finishes law school. But they\u2019ve always struggled to manage their money, even before inheriting a windfall.<\/p>\n
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\u2019re also US$244,000 (C$332,000) in debt, which works out to a negative net worth of -US$184,000 (-C$250,000).<\/p>\n
\u201cLooking back, I regret the way I treated the money,\u201d Noel told Sethi, but at the time she saw it as a gift, which prompted her to treat it like \u201cguilt-free spending.\u201d Mike, on the other hand, \u201chas never been more nervous, and we\u2019ve never had as many fights. He was really stressed out about where the money was going to go.\u201d<\/p>\n
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 Pok\u00e9mon cards, which he justified as an \u201cinvestment.\u201d<\/p>\n
While there are a lot of problems to unpack here \u2014 from Mike\u2019s anxiety around money to Noel\u2019s addiction issues \u2014 their situation demonstrates how quickly a windfall can disappear through a mix of unclear priorities, lifestyle creep and lack of an investment plan.<\/p>\n
A 2024 ISS Market Intelligence report estimates that the wealth transfer in Canada between 2023 and 2032 will reach $1.275 trillion (2).<\/p>\n
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.<\/p>\n
Part of the reason could be psychological. Noel, for example, inherited the money from her dad, with whom she didn\u2019t have a great relationship. \u201cHe was an alcoholic and addict and was really not in my life, and so I had a lot of guilt\u201d about inheriting his assets, she told Sethi.<\/p>\n
A report by The Harris Poll found that inheritances come with complicated emotions. A third (33%) of younger generations say they \u201cfeel stress from managing more (or more complex) assets, while a similar number (34%) are concerned about mismanaging assets (3).”<\/p>\n
And while inheritors are generally grateful and feel a sense of relief from their newfound financial security, one in five (20%) feel the \u201cweight of pressure,\u201d while 18% feel anxiety and 15% feel guilt, according to the poll.<\/p>\n
There\u2019s 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.<\/p>\n
Read more: Keeping over this amount of cash in your bank account is a serious mistake \u2014 how much do you have stashed in there?<\/a><\/p>\n 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\u2019s why having a plan in place \u2014 one tailored to your specific circumstances \u2014 can go a long way in helping you make your inheritance last.<\/p>\n First, you should hold off on any big moves \u2014 like quitting your job or making a major purchase \u2014 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.<\/p>\n If it\u2019s a large sum, you may want to spread those assets across different accounts to ensure you\u2019re 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).<\/p>\n 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\u2019t already have one, you should also consider putting three to six months\u2019 worth of income into an emergency fund.<\/p>\n Stash your inheritance and don\u2019t pay fees using a no-fee high-interest savings account with EQ Bank<\/a> \u2014 earn more while keeping your money accessible.<\/p>\n If you have high-interest debt \u2014 like credit cards or personal loans charging you 20% to 25% in interest \u2014 paying those off should be a priority, since it \u201cgives you an immediate guaranteed return that\u2019s almost impossible to beat through any investment strategy,\u201d according to Sethi (6).<\/p>\n But you may want to hold off on paying back low-interest loans like mortgages, since Sethi says that money \u201cmight generate significantly better returns if invested in diversified index funds over time.\u201d<\/p>\n 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?<\/p>\n Also be cognizant of lifestyle inflation. Just because you inherit a windfall doesn\u2019t 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.<\/p>\n 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.<\/p>\n But Sethi warns against getting too fancy with investments. \u201cBoring index funds and target-date funds are perfect for most of your investment allocation,\u201d giving you broad market exposure without requiring you\u201d to become a stock-picking expert overnight (7).\u201d<\/p>\n Make your savings work harder. Open a self-directed investing account with CIBC Investor\u2019s Edge<\/a> \u2014 low fees, powerful tools, and control over your future.<\/p>\n Sethi\u2019s 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.<\/p>\n While inheriting a windfall can be overwhelming \u2014 and no doubt friends and family will give you plenty of unsolicited advice \u2014 it may be a good idea to seek professional counsel from a registered financial advisor, insurance agent and tax accountant, especially if you\u2019ve come into a rather large windfall.<\/p>\n We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines<\/a>.<\/p>\n Youtube (1<\/a>); Insurance Portal (2<\/a>); The Harris Poll (3<\/a>); Calda Clinig (4<\/a>); CDIC (5<\/a>); I Will Teach You to be Rich (6, 7, 8<\/a>)<\/p>\n This article provides information only and should not be construed as advice. It is provided without warranty of any kind.<\/p>\n","protected":false},"excerpt":{"rendered":"Ramit Sethi We adhere to strict standards of editorial integrity to help you make decisions with confidence. 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