Quick Answer
The smartest thing to do when you receive an inheritance depends on your specific financial situation and goals. However, some general guidelines include:
– Pay off any high-interest debt like credit cards or personal loans
– Build up an emergency fund with 3-6 months of living expenses
– Invest the money according to your risk tolerance and time horizon
– Use a portion for something meaningful like education, starting a business, home purchase, or travel
– Consult a financial advisor for guidance on managing and growing the inheritance
Should I Invest the Money or Pay Off Debt?
If you have any high-interest debt like credit cards or personal loans, it is usually wise to pay those off first before investing your inheritance. The interest rate on high-interest debt is often far higher than you could reasonably expect to earn on investments. Paying this debt off provides a guaranteed “return” in the form of interest savings.
However, you may not want to pay off all debts like mortgages or student loans with low interest rates. These “good” debts may be worth keeping while you invest the inheritance. Speak with a financial advisor about your specific debt and interest rates.
Investment Considerations
Once any high-interest debt is paid off, investing the inheritance can help grow your money over time. Some things to consider when investing an inheritance include:
– Risk tolerance – Are you comfortable with market volatility or do you need lower-risk investments? Your age and investment time horizon also impact your risk tolerance.
– Asset allocation – A diversified portfolio with a mix of stocks, bonds, real estate, etc. can limit risk. Rebalance periodically.
– Tax efficiency – Strategies like retirement accounts, municipal bonds, and trust funds can minimize taxes.
– Fees – Minimize fees by using low-cost index funds when possible. Actively managed funds tend to have higher fees.
– Account structure – Taxable brokerage accounts offer flexibility while IRAs and 401(k)s offer tax perks. Consider your needs.
| Investment Type | Risk Level | Return Potential | Liquidity |
|---|---|---|---|
| Money market funds | Low | Low | High |
| Bonds / Fixed Income | Low-Medium | Low-Medium | Medium-High |
| Stocks / Equities | Medium-High | Medium-High | High |
| Alternative Investments | Varies | Varies | Low |
This table provides a brief overview of various investment types, risk, return potential, and liquidity. Speak to a qualified financial advisor for guidance specific to your situation.
How Much Should Go Towards an Emergency Fund?
Having an emergency cash cushion is an important part of financial health. The standard recommendation is to have 3-6 months of living expenses set aside in safe, liquid assets like a savings account.
If you don’t already have a robust emergency fund, using a portion of the inheritance to save up to 6 months of expenses is generally wise. This helps protect against unexpected costs and loss of income.
Some factors to consider when deciding your emergency fund amount include:
– Your monthly expenses and ability to cover costs if income stops
– Your job security and risk of layoff or reduced hours
– Health risks that could lead to medical bills
– Other potential emergency costs like car repairs or home repairs
– Whether you have a spouse or partner’s income to share expenses
Aim for the high end of the 3-6 month guideline if you have less job security or high health risks. Having this emergency buffer can help you avoid debt or tapping retirement savings when an emergency arises.
Should I Pay Off My Mortgage?
Whether to pay off your mortgage is a common question when someone receives an inheritance. Here are some factors to weigh when making this decision:
Pros of Paying Off Mortgage
– Eliminates monthly mortgage payment and interest costs
– Builds home equity faster
– Reduces debt load and frees up cash flow
– Sense of pride and comfort in owning home outright
Cons of Paying Off Mortgage
– Opportunity cost of not investing the money
– Lost tax deductions for mortgage interest and property tax
– May need to tap home equity in emergency later
– Can get better investment returns than mortgage rate
Run the numbers to see if the “guaranteed return” of your mortgage interest rate outweighs the likely investment returns you could achieve. For very low mortgage rates, investing may come out ahead.
Also consider the mental and emotional benefits of being mortgage free vs. the flexibility of keeping the mortgage and liquid assets. There is no universally right or wrong choice – it depends on your full financial picture.
How Can I Protect the Inheritance and Avoid Family Conflicts?
Inheritances can sometimes spark family conflicts if the assets and distributions are not handled wisely. Here are tips to help protect the inheritance and maintain family harmony:
– Be transparent about estate plans and share documents ahead of time to avoid surprises.
– Communicate openly as a family about estate plans and intentions.
– Treat heirs fairly based on their needs and relationship. Unfair treatment often causes bitterness.
– Split assets with sentimental value evenly or give heirs the chance to take turns selecting.
– Designate a neutral third-party executor like an attorney or trust company.
– Place inherited assets into trusts with clear rules if beneficiaries lack money management skills.
– Set clear boundaries and don’t allow family members to pressure you about how to distribute your assets.
– Seek guidance from estate planning attorneys and financial advisors to create a plan that addresses family dynamics.
– Remind heirs that inheritances should be seen as a gift, not an entitlement. Cultivate gratitude.
With open communication, transparency, and proper estate planning, you can often prevent inheritance disputes and maintain relationships.
Should I Donate Some of the Money to Charity?
Donating a portion of your inheritance to charity can be a fulfilling way to honor your loved one’s legacy and make a positive impact. Some key advantages of charitable donations include:
– Alleviating tax burden – Donations may be tax deductible to offset capital gains or estate taxes.
– Supporting causes and organizations important to you or your loved ones
– Leaving a lasting legacy of giving and values
– Furthering a charity’s mission through a large gift
– Instilling philanthropic values in your children or heirs
Things to consider when donating an inheritance:
– How much can you comfortably give while still meeting your needs?
– Which charities align with your values or your loved one’s passions?
– Can you target donations towards causes your loved one cared about?
– Would appreciated assets like stocks be better for donating than cash?
– Do you want the donation publicly recognized or prefer anonymity?
– Does the charity have low overhead costs and a track record of using funds responsibly?
With forethought, charitable giving can be a meaningful part of an inheritance that makes a difference for others.
Should I Help Family Members with Expenses?
If family members are struggling financially, you may be tempted to give them some of the inheritance to help cover expenses. This requires very careful consideration.
Potential downsides of giving inheritance money to family include:
– Enabling financial irresponsibility if money is mismanaged
– Causing resentment from other relatives who don’t receive funds
– Expectation that you will provide more money again in the future
– Risk that you may not get repaid if money is viewed as a gift
To mitigate risks, consider:
– Making it a loan with repayment terms and interest rate in writing rather than an outright gift
– Requiring the funds be used for a specific purpose like medical bills or education
– Working with a third party like an attorney to formalize any lending arrangement
– Referring the family member to credit counseling or financial literacy resources
– Encouraging budgeting and planning for improved money management
With caution, clear rules, and accountability, loans or gifts to family can sometimes be a win-win. But tread carefully, as money issues can quickly create lasting family rifts.
Should I Splurge on Something Fun Like a Vacation or New Car?
It can be tempting to use part of a financial windfall like an inheritance to splurge on something fun like a vacation getaway, remodel, fancy new car, or other indulgence.
This type of spending can be okay in moderation, as long as it fits within your overall financial plan and won’t leave you cash-strapped or in debt.
Here are some guidelines for splurging responsibly:
– Limit it to 10-20% of the inheritance. The bulk should still be used wisely.
– Make sure normal financial obligations are covered like emergency savings, retirement, and debt payments.
– Choose splurges that align with your values and bring lasting enjoyment. Avoid status symbols.
– Focus on experiences over material items when possible for more satisfaction.
– Be intentional about what you want to splurge on and why rather than spending spontaneously.
– Consider splurging on things that enrich your life like travel, hobbies, or time with loved ones.
With reasonable limits and intentionality, enjoying a small portion of the inheritance can make the experience more meaningful without jeopardizing your finances.
Should I Help My Children or Grandchildren?
It can be fulfilling to use part of an inheritance to help your children, grandchildren, or other younger generations. This can come in many forms:
– Covering education costs
– Helping with a housing down payment
– Funding an investment account
– Paying for enriching experiences like travel
– Contributing to a startup business venture
Some tips for extending inheritance help to younger generations:
– Set guidelines ahead of time for how funds should be used to avoid misunderstandings
– Consider placing assets into a trust structure to protect the principal
– Require financial literacy programs to cultivate money skills
– Tie larger gifts to achieving certain goals or milestones
– Focus on covering needs more than wants to prevent entitlement
– Have candid conversations about family values surrounding money and work
With reasonable controls in place, sharing an inheritance across generations can foster family bonds and set young people up for success. But take steps to prevent dependence and avoid enabling poor money habits.
Should I Speak to a Financial Advisor?
Receiving an inheritance can involve big financial decisions and complicated emotions. Working with an objective, knowledgeable financial advisor can provide guidance and insight on managing your windfall effectively.
Some key benefits of speaking with a financial advisor include:
– Getting tailored advice for your specific situation and financial life stage
– Having an expert develop a detailed investment and distribution plan
– Avoiding rash decisions with the advisor’s more detached perspective
– Gaining specialized knowledge on topics like taxes, trusts, and asset management
– Discussing your full financial picture including assets, debts, family situation, and goals
– Understanding how to balance current needs, long-term goals, and legacy intentions
Even if you have general financial knowledge, the expertise of an advisor can prove invaluable when navigating major inheritance decisions. Take time to select an advisor you trust and whose style aligns with your values.
Conclusion
Receiving an inheritance can be a complex experience loaded with conflicting emotions and pressures. While handling this windfall responsibly takes patience and work, the potential rewards are great if you invest wisely, stay organized, communicate openly, and don’t let the money negatively impact relationships or votre values.
Seeking input from an experienced financial advisor while also doing thorough self-reflection on your family’s needs will lead to the most fulfilling outcome. With care and intention, your inheritance can become a blessing for both you and generations to come. The key is having the courage and discipline to make the wisest choices.