Dear Penny: How Do I Avoid Wasting My Surprise $4 Million Inheritance?

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Dear Penny,

My mother passed away last year, and I am set to inherit her large house (worth $2.5 million) and additionally about $1.5 million. My husband, daughter and I already live in the house, as we were taking care of my mother before she passed. 

My husband and I both make a modest living, so this inheritance will obviously make a huge difference to our family’s financial security. However, we never expected to have this amount of money on our hands and want to make sure we invest it responsibly so that it can be a long-term benefit to our lives and our daughter’s future. 

We feel like we don’t know where to begin to think about making wise investments. Real estate? Stocks? Just save it up all in a high-yield savings account or CD? Where or who can we go to for the most trustworthy advice on what to do with this money? 

Obviously, this is the best kind of problem to have, but we want to make sure we don’t blow it all on silly spending.

— A.

Dear A.,

People often feel pressure to make big decisions right away when they receive a large inheritance. But rarely is there a need for this sense of urgency. You don’t need to make any big decisions right away. In fact, acting too quickly can cause you to make emotional decisions that aren’t in your best interest.

Because you asked for advice about investing your inheritance, I’ll tell you what I’d do if I received an unexpected windfall: I’d put aside enough money in a high-yield savings account to cover a year or two’s worth of living expenses. Then I’d invest the rest in a low-cost index fund that tracks most of the U.S. stock market, like an S&P 500 fund.

Dear Penny

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But that’s what I’d do based on my own goals and risk tolerance. Once your mother’s estate is settled, your first move is to find a financial adviser who can determine what the most suitable investments are for you. Look for an adviser who’s paid using a fee-only model instead of by commission. That means you’ll be paying them based on the services they provide you instead of the products they sell you.

A typical adviser fee is around 1% of assets under management, though sometimes the fee is lower for large amounts of money. Some advisers charge an hourly fee rather than a fee based on the assets they manage, but these structures are more common when you’re seeking advice on a shorter-term goal, rather than long-term financial planning.

The National Association of Personal Financial Advisors (NAPFA) website is a good resource for finding an adviser. It contains a directory of fee-only advisers that you can search by ZIP code. All of its member advisers are fiduciaries, which means they’re required to act in your best interest.

You may want to meet with several advisers and hire the one you feel most comfortable with. Think of it like looking for a doctor. You want someone who listens to you and takes time to understand your goals. It’s important to find someone who explains things to you in language that you understand. If you feel pressured in any way, consider it a sign that the adviser won’t be a good fit.

Though you expressed concerns about investing the money wisely, keep in mind that investing is just one component of financial planning. When your net worth suddenly increases, your insurance needs often change. You may also want to update your estate planning documents. For example, if you and your husband plan to leave the bulk of your assets to your daughter, you may want to set up a revocable living trust so that you can set perimeters around how she receives the inheritance.

Beyond the financial planning nitty-gritty, give yourself permission to dream a bit. You say you don’t want to blow your inheritance on “silly spending.” But you’re about to receive a life-changing inheritance after many years of living on modest means.

What did you dream about doing back when you never imagined you’d have seven figures to your name? I don’t support going on a spending spree and buying expensive cars and clothes just because you have money in the bank. But going on the vacation you’ve always imagined taking or pursuing your favorite hobby isn’t silly spending.

When you unexpectedly come into money, it often seems like a non-problem. But inheritances can be fraught with emotions. Some people feel guilty that their newfound financial freedom is the result of their loved one’s death.

Focus on spending with intention. I don’t think you have to worry about wasting this money if you think carefully about whether you’re spending in a way that aligns with your values and your goals.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].