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) consider paying it off. If your personal debt is more than your inheritance, it might make sense to 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 plan.

Enjoy your inheritance. Use it wisely.