Receiving an inheritance is nothing short of a blessing. With increased longevity taking hold of both the Baby Boomers and their parents, it’s likely going to stretch many a nest egg just to make it through one’s retirement years. If you consider that healthcare costs also tend to be the highest in the last few years of life, the odds of receiving a considerable inheritance will most likely continue to dwindle for many of us in the years ahead. However, if you are fortunate enough to benefit from an inheritance, here’s my top 5 list of things you should do with those funds.
Note: This is a general list and by no means should it be considered all-inclusive. Each and every person’s financial situation is unique, and it’s quite possible that you may have a better use for the funds than the ones listed below. My reasons are to be used as a general guide, and they are in no particular order.
Pay Off Student Loan Debt.
Student loans continue to be the weight around the necks of those who have them OR those who are obligated to help pay for them (like parents who’ve co-signed a loan). With the increasing cost of going to college outpacing many people’s ability to afford school, the student loan industry is alive and well. Unfortunately, students are carrying these loans for years and years beyond their graduation date, which hinders their ability to save, purchase a home, or invest earnings from employment. If you inherit money that enables you to pay off your student loan debts, do it!
Make a Down Payment on a Home
Interest rates, while beginning to see some upward pressure, are still very favorable for home buyers. If you have been looking for the opportunity to get away from the apartment life and become a homeowner, getting an inheritance may afford you with the opportunity. I have heard some people tell me that renting is so much simpler, and they have the ability to have roommates help with the costs of the apartment. To them I say you can have roommates at your house as well. The difference is they will be helping you create equity in a home. The key, of course, is to make a wise purchase and not attempt to buy more house than you can reasonably afford.
*In some cases, an inheritance may enable you to pay off a mortgage. In my opinion, this financial move is highly dependent on the individual situation, so I would consult with a CERTIFIED FINANCIAL PLANNER™ if this applies to you.
Eliminate Credit Card Debt
This one goes somewhat hand in hand with student loan debt; however, there are many people who continuously carry a credit card balance that have no business doing so. It may seem a bit bittersweet taking inheritance funds, which feel like found money, and putting them into a credit card bill. However, your mental accounting is failing you if you think this way. You see, the credit card money is money you didn’t have that you’ve spent—now you must pay it back. Also, credit card interest rates can be unforgiving, as I have seen rates as high as 19.99% on some cards. With rates like that, it’s almost impossible to get that debt paid down. Go ahead and eat the frog—pay that bill off before you can talk yourself out of it.
Invest The Funds
This one should be obvious, but it must be included because while it seems obvious, few people have the willpower to delay consumption today by investing for tomorrow. However, it is common for many of us to feel like we are behind on saving and investing for our retirement years. Inheritance money can offer an opportunity to add a boost to your investment accounts, or if you don’t have any investments, this can be your opportunity to begin your investing journey.
If you have children, paying for college is likely on your parental radar. If you are not yet attending college, having an inheritance that can cover some or all of your college expenses is an incredible advantage! Now—when I say college expenses, I’m not talking about pizza or beer. I’m talking about tuition, room & board, and textbooks. Using inheritance funds to help eliminate the need to take on student loans OR to reduce the amount of loans is not something that should be discounted. For parents with kids, giving them a debt-free education opportunity can be one of the greatest financial advantages you offer your children…just don’t let them study something like Art Philosophy or another program that has little chance of affording them the ability to earn an income after graduation.
I can think of more ideas for how to use inheritance funds—some others that I didn’t put in my top 5 could be:
-create a savings fund
-donate to charity
-fund/payoff wedding expenses
-purchase investment property (real estate)
-pay off a car note
Gaining an inheritance is a gift, and you should leverage that gift for maximum impact. Of course, I’m not an all work, no play type of person; therefore, I do believe you should set aside a portion of the funds to be used for some type of memorable experience or personal enjoyment. However, I cannot stress enough that the “fun” money should not take a priority over the “smart” money. Leverage those inheritance dollars for maximum financial impact!