By Paul S. McNulty, CFP®
You just received an inheritance and you’re experiencing a range of emotions—grief, shock, gratitude, and confusion—just to name a few! And the question likely running through your head is, “What do I do now?” Your first step is to take a moment. Give yourself some time to not only grieve the loss of the person who gave you the inheritance and let your emotions settle, but to make a solid plan. One-third of inheritance recipients blow through their inheritance within the first couple of years, and you don’t want to follow in their footsteps. (1)
Even if the gift you receive isn’t a significant amount, you’d be amazed at how some smart strategizing can make a big difference down the road. Let’s look at some ways you can use your inheritance to set yourself up for success, both now and in the future.
1. Pay Off Debt
Big debt, small debt, it doesn’t matter. Debt is debt. Start with high-interest debt and work your way down. Did you know that the average American household carries over $6,849 in credit card debt and pays an average of $1,162 in interest annually? (2) Sure, using your extra influx of money to reduce debt isn’t as fun as going on a trip, but think of the satisfaction you’ll feel when you see your balance decrease, knowing that you are saving yourself thousands of dollars in interest in the long run.
2. Invest It
Are you on track for retirement? Do you have short-term financial goals that you want to reach? Look at the big picture of your finances and determine how you want to save, spend, or invest your money. For example, if you want to buy a house, consider using some of your inheritance as a down payment. If you wish you could pay for college for your children or grandchildren, think about opening college savings accounts.
Even if you diligently contribute to a 401(k) or IRA, chances are you aren’t maxing out those accounts. Consider contributing part of your inheritance to your retirement accounts so you can take advantage of both positive tax treatment and compound interest. If you’ve already maxed out your accounts for the year, talk to your financial professional about other investment opportunities to bolster your portfolio.
And long-term savings aside, be sure to use a portion of your inheritance to create an emergency fund, if you don’t already have one. Save around 3-6 months of living expenses to cushion the blow of the unexpected.
3. Be Generous
Is there a cause you are passionate about? Do you want to use the money in a way that honors the one who left it to you? There are many worthy organizations that would benefit from your generosity now that you have some unexpected funds. You could even open a donor-advised fund and receive a tax deduction for the current year, then let your gift grow tax-free as you slowly transfer the funds to your chosen charities.
4. Enjoy It
Once you have a plan for where the money will go, don’t be afraid to spend some of it. Take your family on that dream vacation or pursue a hobby that you couldn’t afford previously. The money is a gift. Be wise with it, but also use it to add to your quality of life.
5. Get Professional Advice
Receiving a large influx of money is often a once-in-a-lifetime event, which means you probably haven’t given much thought to how to handle it. That’s normal, but that’s also why it’s important that you consult with a professional who can help you keep your goals in mind and manage the details that come along with an inheritance.
At Boston Metro Advisor, it’s our goal to help you protect your money. We can break down all your options so you can make the right decision based on your financial situation, goals, and values and make sure you don’t pay any unnecessary taxes on your inheritance. As experienced professionals, we aim to ease any concerns you have about getting an inheritance. To learn more about how we can help you with this major life event, send me an email at [email protected] or call me at (781) 995-0253.
Paul McNulty is the founder of Boston Metro Advisor with over 20 years of experience helping people navigate the ups and downs of the economy toward the financial future they envision. His education consists of a Bachelor of Science in business administration from the University of Rhode Island and the CERTIFIED FINANCIAL PLANNER™ (CFP®) professional designation.
Paul’s experience and education have made him a multi-faceted professional capable of assisting people with virtually all their financial needs. His services include every facet of retirement planning, from 401(k) rollover services and income planning to wealth management and estate planning. Paul has been active in his community over the years as a youth sports coach. When he’s not spending time with his wife, Cindy, and their two children, who are both recent college graduates, Paul enjoys reading, playing golf, and fishing. Learn more about Paul by connecting with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.