When large sums of money fall into your hands, you may wonder what you should spend it on. Some use large inheritances to buy big-ticket items that they have always dreamed of, like cars and vacations. Others prefer to invest their newly acquired cash into certain endeavors or start-ups.
Whatever route you end up deciding to take with a large inheritance, it’s worth thinking a little more deliberately about how you can maximize your windfall. Here are a few ideas and approaches that could extend your inheritance’s value responsibly.
Assess Your Current Financial Status
First of all, slow down. You shouldn’t feel in any rush to make spending or investment decisions. Before you make any moves with your inheritance proceeds, take a longer look at your current financial situation.
What were your spending patterns before you received the inheritance? What outstanding debts or bills do you currently have? How do you manage cash flow? How can this windfall improve your financial standing?
Suddenly having a large amount of money changes a lot of people. That is why it’s so important to take stock of your finances and overall goals before you make your final decisions on what to do.
Consult With a Financial Planner
A qualified financial planner or adviser can usher you through the many options you have for using your inheritance. They can give you more details on opportunities you’re considering and introduce you to some you never even knew about.
Hiring a certified financial planner proves that you are prepared to be judicious about what you’ll do with your inheritance money. A fiduciary is bound by regulation to put their client’s interests first. This means you know you’ll be getting objective and goal-oriented assistance and information.
Pay Down High-Interest Debts
Some debts incur higher interest charges than others, including credit cards, personal loans, and private student loans. When left unaddressed, the interest charges for these accounts compound and inflate the balance you owe.
With an inheritance, you have the opportunity to make a serious dent in your high-interest debt bill — if not pay it off entirely. Consider making those debt payments the priority. This can be the first step in improving your credit history.
Build a Long-Term Investment Portfolio
Again, it’s tempting to buy a lot of stuff when you find yourself suddenly flush with cash. But a better idea is to look at the long view and find opportunities to grow your new wealth through investments.
If you already have an investment portfolio, new money gives you a chance to expand and diversify your holdings. You can do this with a mix of value and growth stocks. You can invest in foundational instruments like bonds, real estate investment trusts (REITs), and alternative investments.
With the right blend of long-term investments, you can work toward building a healthy financial future that supports you and your family as you continue on the road to retirement.
Set Up an Emergency Fund
Most financial advisers recommend opening a savings account for emergencies. The rule of thumb is that the fund should cover three to six months of living expenses if possible. An emergency fund can help you pave the way after getting laid off or being unable to work for a spell.
You can use your inheritance money to fully fund the emergency account at once. It can be in the form of an investment or retirement portfolio that generates more income over time.
Consider Donating to Charity
Making charitable donations with your inheritance is a great way to help those in need and honor the name of your benefactor. It’s also a tax-efficient strategy, as donations to qualified charities can be written off on your annual tax return.
Consider what issues are close to your heart. You can find several websites that review and rate various charities or search charity registers to find approved and regulated organizations to give to.
Update Your Estate Plan
Finally, your inheritance may bring to mind what your estate and legacy could be. Once you’ve considered your options and made decisions, build or update your estate plan to reflect your new situation. You could change your beneficiary’s life the same way yours just changed. Think about the benefits of paying it forward.
Good Life Financial Advisors: In Your Corner
Good Life Financial Advisors can lead you through your options after you’ve come into a large inheritance. To sign up for a risk-free first consultation, contact us online.