Sudden Windfall? Smart Ideas to Help an Inheritance Grow

Sudden Windfall? Smart Ideas to Help an Inheritance Grow

Wondering how to invest your inheritance? Coming into a large amount of money might seem like a free pass to quit your job, buy a new car, or take your dream vacation. But financial advisors say the best strategy may be to do nothing. That’s right, keep this windfall out of your checking account for three to six months, because if you see it, you’ll spend it. In the meantime, start to formulate a plan to help that inheritance grow.

1. Be thoughtful and deliberate. A one-time windfall is not annual cash flow and should be managed with care. Beware of the dangerous thought, “This is so much money, I can’t possibly spend it all.” Actually, you probably can.

2. Emergency fund. Consider establishing an emergency fund if you don’t already have one. Experts recommend holding three to six months’ worth of living expenses in a liquid account for emergencies.

3. Pay down debt. Assess your debt obligations. In general, if you have high-interest credit card debt, pay that off immediately. Mortgage debt could be a more difficult question given today’s relatively low interest rate environment. Could you do better by investing the money earmarked to pay off your home? “If it’s a low-rate mortgage, and you are relatively young with decent employment prospects, you’d probably be better off investing which, over time, should pay  at a higher rate,” says Danielle Schultz, a certified planner and principal at Haven Financial Solutions, Inc., a fee-only financial planning and investment management firm.

4. Max out retirement accounts. The next step is to max out your eligible retirement accounts. It doesn’t matter if the actual check is written from your earned income or an inheritance account, as long as you meet eligibility criteria. “Say you earn $65,000 this year and spent it all, but now receive an inheritance of $100,000. Contribute to a Roth IRA or workplace retirement from the $100,000, sheltering some of it from taxes and allowing it to earn tax free/deferred,” Schultz says.

5. Invest to help it grow. If there are remaining funds after establishing an emergency fund, paying down debt, and funding retirement accounts, now you have a pool to invest your inheritance for the long term. “But don’t just buy stocks on a feeling or the recommendation of your brother-in-law, or someone you sit next to on a plane who is the VP of the company. That’s how I personally lost $8,000 many years before I became a financial planner. Learn how to analyze stocks. Join an investment club. Read a few basic books on investing by reputable authors—Burton Malkiel, John Bogle, Jonathan Clements, or others,” Schultz advises.

If you are working with a financial advisor, it pays to ask a lot of questions. “Be wary of people who will separate you from your money. Know how any advisor is getting paid, and whether they are a fiduciary or obligated to put your best interests at heart. Ask!” Schultz concludes.

Bonus: Splurge. Some advisors suggest that, based on your overall financial situation, it’s A-OK to spend 10% on yourself. Sure, give yourself that dream vacation or new set of wheels. But leave the remaining 90% to your overall financial plan, which can help you on your path to financial security. 

Sit. Roll. Get Rewarded.

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The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

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