Before you start counting the money you’re inheriting from Grandma, be sure she has her estate plan set up according to applicable state laws.
According to an Ohio State University study on inheritance spending, Americans spend about half of the money they inherit. The rest is spent on clothing, cars, dining out, and paying off debt. That could be an indication of the lack of financial education about topics like saving and investing as well as our consumer habits. In other words, we don’t know why saving is important and we end up spending before we have the money to pay off the debt. It’s a financial roller coaster.
First things first. Before you start counting the money you’re inheriting from Grandma, be sure she has her estate plan set up according to applicable state laws. Otherwise, the big inheritance can go toward paying court and attorney fees instead of financing her legacy. Now that you’ve helped her set up her trust and estate, let’s talk about the best ways to invest your inheritance when the time comes.
Best ways to invest your inheritance
While it is beneficial to pay off debt, when you inherit a significant sum of money, consider saving and spending. In the long run, it will help you establish an emergency fund or savings for expenses like home and car repairs, while also paying down debt; you’re ending the cycle of debt.
1. Funding emergency savings. If you haven’t established an emergency fund of at least three months of expenses, start the day you receive the inheritance. Should you or your spouse lose their job, you can still pay the bills.
2. Pay off debt. American consumerism and a struggling economy have left many families in credit card and student loan debt. Pay down credit cards, establish payment plans with student loans, and consider increasing payments on the car and house.
3. Use inheritance as a down payment on a home. If you’re struggling to come up with a down payment on your first home, this is a great opportunity to invest in your future. Ask about down payment assistance grants that are available in states like Arizona, which can make buying a home easier. You may find you qualify for a grant and can use your inheritance differently.
4. Renovate the house. Are you a homeowner? Ask your real estate professional to run comps on your home to see if it makes sense for you to renovate rather than sell and purchase another one.
5. Fund education. Rather than taking on student loans, consider funding your education or a college fund for your children or grandchildren.
6. Max Traditional IRA or Roth IRA contribution. Check with your financial professional regarding timelines and maximum contributions to traditional and Roth IRAs. Rather than spending the money now, invest in your retirement.
7. Take a vacation. Taking time away from your regular schedule is refreshing and gets the creative juices flowing when you return to work. Make the most of the time off by unplugging electronics, including phone, sitting back, and relaxing with loved ones.
While I don’t recommend spending an entire inheritance, there’s nothing wrong with taking 10% and having fun by going on vacation. When you get back, let’s talk about how to invest the rest of your inheritance!
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.