Most people view inheritance as winning the lottery. It doesn’t matter whether it is a small bundle of cash or a significant windfall. They start making plans for spending the money as soon as they receive it. However, they don’t realize that inheritance can be a huge opportunity and make a considerable difference in their financial planning.
If you are in a similar situation and wondering what to do with your inheritance money, these tips can be of great help.
Hire a financial advisor
If you have inherited a large sum, it may make sense to hire an expert. After all, you do not want to make hasty decisions and ruin your chances of a good future. A financial advisor will suggest investments that will not only grow your money but also offer tax relief. For instance, if you receive an inheritance from your spouse in the form of IRAs or 401(k), you can transfer the entire amount to your own account. You may have to keep the amount in your account for a long time to enjoy tax advantages. Similarly, if you receive Roth IRA, you may have to hold any withdrawals for up to five years to avoid any taxes on the gains. If you have limited knowledge about how these systems work, it is best to take professional services from an expert.
Impose a financial timeout
Most people end up spending their inheritance within the first two years of receiving it. To avoid such a situation, you may try imposing a rule of not spending the money for some time. This period could range from six months to two years.
Invest a portion
There is nothing worse than letting your money sit idle in your bank account. While you may want some liquidity to handle any unannounced emergencies, you must have a plan for the rest of it. Whether you are working with a financial advisor or not, you must know the different investment options available in the market. For instance, you can choose to invest in a mutual fund as a long term strategy. Although mutual funds are subjected to a high level of risk, they also yield good returns. You can opt for a mutual fund managed by a trusted firm to avoid frauds and risks.
Reduce your debt
Consider inheritance as a blessing if there is debt looming over your head. Any kind of unpaid debt can quickly escalate to exorbitant levels if you do not pay your dues on time. The worst kind of debt is credit card debt as the interest rates are quite high. In fact, credit card debts are known to have wrecked quite a few homes. For any other kind of debt like mortgage or loans, you may want to understand the penalty for early repayments or foreclosures. Paying up your debt will improve your future cash flow and also secure your future.
Start a business
Have you been mulling over starting a new venture but could never fully get on with the idea? Perhaps, you needed some initial investment to get started. Or you couldn’t risk being out of the job and risk the financial well-being of your money. In such scenarios, inheritance can be your ticket to your dreams. However, it would be unwise to put all your money into your business.
It is understandable if you want to use a portion of your inheritance to pamper yourself. As long as the budget permits, you can use it to pay for a vacation or buy a luxury item for yourself. The only thing to keep in mind is to not spend all of your inheritance on such impulsive splurges.
Pass it on to your heirs and charities
It will be a job done well if you could make your inheritance last your lifetime. To ensure this, you must choose your investments wisely to pass it on to the next generation. You can also choose a donate a part of it to a charity that is close to your heart. This will ensure a good night’s sleep for the rest of your life.