Budgets and Money

Make the Most of an Inheritance

Receiving an inheritance can bring stress and uncertainty. Here are a few tips to help you stretch your inheritance, such as paying down debt and building an emergency fund.

What to do with an Inheritance?

The silver screen has had its share of movies, comedies and dramas about people inheriting money. Remember “Brewster’s Millions” with Richard Pryor and John Candy? It may seem like a dream come true to have to figure out what to do with an inheritance. Realistically though, receiving an inheritance may also bring grief, anxiety and uncertainty.

If you’re receiving an inheritance, here are a few tips to start you on a sound path.

  1. Take your time – First and foremost, take time to grieve. Don’t rush into making any long-term financial decisions. Grief can dull our decision-making skills and some financial decisions can be expensive to reverse. In the short-term, your savings account can be the perfect place to park your inheritance. You won’t earn much interest, but you have easy access, no fees, and it is federally insured up to $250,000 per depositor per covered bank. Other short-term financial vehicles to consider include money markets and short-term CDs (certificate of deposit). In the short-term, time is on your side.

  2. Look forward and backward – There’s no guidebook about how to spend an inheritance. Here’s a fast and easy way to write a guide suited especially for you. Spend 30 to 60 minutes to consider: Twenty years from now, when you look back at how you used your inheritance, what do you want to see? What do you want to have accomplished? What memories have you created? How have you honored your benefactor? What do you want to leave behind? Put your thoughts on paper then prioritize them. This is your plan. Consult it often. Share it with your financial adviser.

  3. Cover the tax bill – Before you spend anything, account for the taxes you may owe. Not all inheritance comes as cash. It may be property or investments. Usually, the executor of the estate will withhold taxes due on cash distributions. But if you inherit the family home for instance, you may have taxes to pay. Discuss the tax implications with an accountant and plan accordingly.

  4. Find an adviser – A good financial adviser is an important asset for all of us. That is especially true when facing a number of financial decisions. Interview several advisers until you find a match. A good financial adviser should be willing to explain financial products, explain her recommendations and encourage questions. Share your look forward / backward plan. You want an adviser that understands and respects what is important to you.

  5. Pay down debt – If you are carrying personal debt (e.g. credit card) pay it off. If your personal debt is more than your inheritance, pay off the card charging the highest interest rate first.

  6. Build an emergency fund – An emergency fund is crucial to any sound financial plan. If you don’t have an emergency fund or if it is not sufficient, this is a wise use of your inheritance. Most financial planners agree that your emergency fund should be enough to cover your expenses for six months.

  7. Spend some – Give yourself permission to spend some of your inheritance. Have some fun! Your look forward / look backward list must have at least one fun activity. Look at your answer for the “what memories do you want to create?” question. That can usually provide inspiration for ways to spend some of your inheritance on something meaningful rather than frivolous.

  8. Fund your retirement – Whether you are 25 or 50, you will be retiring before you know it. Compounding interest is a wonderful thing; let it work for you by contributing something extra to your retirement savings account. Your financial adviser can suggest an IRA, Roth IRA or other investment.

Enjoy your inheritance. Spend it and use it wisely.

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax‐related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.

What To Do With An Inheritance

Wondering what to do with an inheritance? Receiving an inheritance, especially an unexpected one, might leave you feeling overwhelmed by the options. Ideally, an inheritance should bring you closer to financial independence, but the most important thing you can do is seek help from a financial adviser or financial planner to put a strategy in place. An adviser can help you plan investments, retirement savings, build an emergency fund and much more. Though a strategy will help you keep and grow the assets you've inherited, it doesn't have to be perfect or static. It can and should change over time.

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