An inheritance should be the gift that keeps on giving – it is intended to make life easier and offer a sense of financial relief. All too often inheritance funds are spent within ten years – never getting to serve their true intention.
Recently a client came to me after learning she was to receive a sizable inheritance. Her mom had passed – expectedly – leaving my client the entirety of her estate – my client is an only child.
At first she looked at the inheritance as a way to finally get those things in life that she longed for – luxury items you could say. So my first piece of advice to her was to park the money – put it in the bank, and let us strategize.
When receiving an inheritance, here are the seven steps you should take:
- Put the money in the bank – if it is more than $250,000 – the most that FDIC will cover per account – divide it among multiple banks. Better yet, put it in a three or six-month CD with a penalty for early withdrawal – so that you’ll be less likely to touch it quickly.
- Strategize paying off debt. Your inheritance should target the demolition of high-interest, non-deductible debt. But once the debt is paid off – curb the behaviors that caused the debt to begin with.
- Boost your emergency fund. This if often overlooked but is essential to assuring that future debt is not incurred unexpectedly.
- Prioritize your “wish list.” Yes, there are things we all dream of – travel, a second home, a backyard pool, the new car. But consider sending your children to college debt-free, or putting that new roof on your house.
- Keep your job. When you have been given a sizable inheritance it can be very tempting to consider working less or not at all. But unless you have inherited several million dollars – you need to keep “punching a clock” like the rest of us. Otherwise you will blow through the money all too quickly.
- Boost your savings. If you’re not already making maximum contributions to your retirement plan, you should use some of your inheritance toward that end. Consider a 529 college savings plan for your children or grandchildren.
- Consider creating your own “personal pension plan.” Invest the money with a long-term strategy – with a guaranteed return to be realized during retirement. This will either allow you to retire early or retire with a larger income.
- Splurge, just a little. Yes, go ahead, now that you have taken care of more pressing matters take some of the inheritance and enjoy it. Select those expenditures that will make memories in your loved one’s name.
As my client considered these seven steps she was much more able to make sound decisions about her inheritance. She funded her children’s college got some much needed home repairs, a home addition and a retirement investment account. She strategized well on what to do with her newfound funds. And with the way she did – this inheritance will benefit her and her family for decades to come!
