The 5 worst things you can do with your inheritance, according to a financial planner

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• Research shows that the average person burns through their inheritance in about five years, unless it is invested properly.
• The worst things you can do with an inheritance are spend it on assets you can't maintain, sit on it, or invest it all in one place.
• The wisest thing you can do is speak to a financial planner, preferably before you even inherit the money. 

It's easy to assume that receiving a large sum of money, like an inheritance, can change your financial situation forever. But in reality, it depends on the decisions you make with that cash.  

"On average, an inheritance is gone within five years of receiving it, unless it is invested in financial assets or housing equity," said Shala L. Walker, CFP. 

Walker knows how fast and easy money can fly. She's worked with heirs who have received enough money to change their lives completely and instead witnessed them spend it, only coming to her after the fact.

She shared five of the worst things you can do if you inherit money.

1. Sitting on the cash long-term

If you sit on cash, you can run into three major risks: The first is that inflation will catch up with it; the second is that you miss out on money you could have made if you'd invested your cash well; and finally, you are more prone to spending money that's lying around.

"I've actually seen that people tend to sit on the cash for a long time; they are afraid to invest it and they don't really know what to do so they don't do anything," said Walker.

Instead, Walker recommends speaking to a financial planner as soon as possible for help deciding what to do with your cash, including investing it in a diversified portfolio.

2. Buying an asset you can't maintain 

One of the biggest mistakes heirs make with large sums of cash is buying an asset they can't maintain long-term, such as an expensive home. 

"Overspending is the No. 1 issue," said Walker. She's seen heirs purchase homes outside their price range, even spending 100% of their inheritance on the purchase, and ending up with property taxes they can't afford or homes that are expensive to furnish and maintain. 

3. Holding onto an inherited property you can't afford

Not all inheritance comes in cash — some can be in the form of property. Walker said this kind of inheritance can be the trickiest, because heirs often have an emotional attachment to an asset they can't afford to maintain.

"On paper it increased their net worth, but they were having to use their liquid assets in order to maintain the new property. So, cash flow wise, they were house poor," said Walker.

She recommends carefully examining an inherited asset's terms and conditions. This includes existing leases, money owed, contracts pending, and even the time and hassle it may require to maintain the property or asset.

Walker has seen individuals who don't have the income or cash flow to maintain an inherited property keep it for sentimental reasons anyway. Many end up dipping into savings and retirement funds to pay off bills.

Her main advice: Don't assume you must hold onto the asset.

4. Putting all your money in one place

In general, it is a bad idea to put all your money in one place, such as a single stock or piece of property.

"If you are building a new portfolio, you want to make sure it is diversified even if you are considering real estate. Spread it out so you are reducing your risk," said Walker.

5. Not speaking to a financial planner

If you've inherited money or an asset of some kind, speaking with a financial planner will help you optimize your inheritance so you don't risk losing it all or ending up in a worse financial situation than you were before.

A financial planner can help you build a diversified portfolio that includes real estate or other big purchases and ensure you have the money to hold onto them for years to come.

This article was originally published in January 2021.