What Should I Do with my Inheritance?
Most heirs do not realize the average inheritance takes more than a year and a half to complete the probate court process and distribute money to the heirs. Young and rich; it sounds like a great combination; and it is, but “rich” is a relative term. A sum that can last one person a lifetime might last another just a few years, months, or even weeks. If you are lucky enough to inherit a large amount of money when you are young, here are six tips that will help ensure that your fortune lasts at least if you do.
- Heal and Grieve First. Avoid emotional financial decisions.
- After you receive an inheritance, the best thing to do is put your money in a savings account or another safe investment for any time between one month and one year.
- Allow sufficient time for the pain of your loss to begin to heal before you make any major decisions about the money.
- The first thing many people do when they inherit money is look for ways to spend it. Some new clothes, a flashy car, a European vacation, a beach house – the list can grow until the money runs out. Instead of rushing out to the mall or the car dealer, young heirs should spend some time evaluating their financial situation. Making this effort will give you a good view of your overall financial condition, including income, expenses, assets, debts and liabilities. Read Evaluating Your Personal Financial Statement to get started.
- Pay Off Debts, Don’t Incur Them.
- After you have completed your financial review, look at your balance sheet. If you have debts, it may be a good idea to use your inheritance to pay them down or pay them off. This will free up your future cash flow, reduce your expenses and save you the money that would otherwise go toward paying interest on your debts. While some people argue the differences between Good Debt Vs. Bad Debt, nobody ever got into financial trouble by having no debt at all. When given the choice, conservative investors choose to eliminate debt.
- Paying down credit cards with high interest rates or student loans with higher interest rates would be a good thing to do, but do not pay off all debt. You may want to think twice before paying off your mortgage, since in some cases the money could be put to better use in another investment. For example, you may make more in interest on an investment than you would pay in interest on your mortgage. Interest payments on your mortgage also have tax benefits.
- Make Investing a Priority
- Investing might seem risky, but with careful planning, you could create a steady return by investing your inheritance.
- Once you have taken care of your debts, it is time to invest. Acting on the "pay yourself first" principle, you can put your newfound wealth to work. By investing your inheritance, you give it an opportunity to grow.
- Leave Something for Your Heirs
- Your inheritance is a blessing that, if well managed, can make a lasting, positive impact on your life. If you can, continue the legacy by making plans to bequeath a nice inheritance to your heirs or favorite charities. To make sure you do justice not only to what you have received but to the generations that will follow. However, keep in mind that in terms of longevity, inherited wealth has a bad track record. Some 70% of that wealth is lost by the second generation and 90% is gone by the third generation.
- Contribute to Your Retirement
- If you have not yet contributed the maximum amount, putting part of your inheritance into a retirement account will help you work toward securing your financial future. However, that is not to say those who expect an inheritance in the future should neglect their retirement savings. About two-thirds of Americans say the inheritances they receive will at least partly fund their retirement, and 10% say they will completely rely on their inheritance to retire. What you expect to inherit and what you receive could be very different, so until you inherit the money, it is best to be proactive about saving for your retirement.
Ultimately, your plan for your inheritance will depend on where you are in life and your priorities. You may choose to put money toward your education or a child’s education, initiate some much-needed home repairs, open a health savings account, or purchase a reliable car to replace your old clunker. If you receive a large sum, you may choose to invest it a little at a time over many years. Most likely, your strategy will be a mixture of both. Hughes Warren has trained financial advisors to help you make sure you take your time in deciding what is best for you in the long run.