So a loved one left you money, either expectedly or unexpectedly. It might be tempting to treat yourself or your family to a luxury. A new car, a long vacation, new teeth, a facelift... ok, the last two are more impractical but you get the idea. I’m not saying it’s wrong to use a portion of it for fun, just make sure you don’t blow it all on impulse spending. An inheritance can be extremely important to your financial future, however, it’s not something that can be counted on (in most cases) or relied on to get you to the retirement finish line. And often, the inheritance comes with a lot of grieving and emotional upheaval that must be dealt with too.
So STOP, LOOK, and LISTEN to your trusted advisors and family. Think about what’s best for you and your financial future before you act. The first thing you should do is “park it” for the time being, consider an FDIC-insured money market account, until you really think about what you want to do. Don’t put it in a checking account where it can easily be spent, even small amounts on trivial things because they can add up to a larger amount very quickly.
After you’ve successfully parked your money take some time to think about your options. Some people will feel comfortable consulting their financial planner, CPA, or for larger sums, their estate planning attorney. Or you may want to manage it yourself.
Here are three smart ways to use an inheritance for your financial well-being:
- SAVE FOR EMERGENCIES
If you don’t have an emergency fund, this should be your top priority. How much? A good rule of thumb is 3-6 months’ worth of your total bills for one month. More if you work on a commission or irregular income. It might be tempting to use your inheritance to pay off your debt right away but without an emergency fund you could end up back in the same debt boat again quickly.
- PAY DOWN DEBT
Once you have an adequate emergency fund, try paying off all high-interest debt like credit cards and auto loans. Being free of that kind of debt can be a huge load off your shoulders. That being said, paying off your mortgage may not be a good idea. Since mortgage interest can be used as a tax deduction in some cases, it might make more sense to invest any money left over.
- CONTRIBUTE TO YOUR RETIREMENT
If you haven’t maxed out your retirement contributions for the year, putting part of your inheritance into your retirement account will help on your path to securing your financial future. However, if you think you may be inheriting money in the future that doesn’t mean that you should neglect saving for retirement prior to that. What you expect and what you actually receive could be two different things so don’t count your chickens and all that.
Ultimately, what you decide to do will depend on where you are in life and what your priorities are. There may be many roads to go down with an inheritance… a down payment for a new house, college savings for your children, home repairs you’ve been putting off, that new Maserati (just seeing if you’re paying attention) or retirement savings. Whatever it is, your strategy should be based on priorities and what is best for you in the long run.
As always, if you have questions we are here to help.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Money Market Accounts are FDIC insured whereas securities carry no FDIC insurance.