When you inherit money from a loved one, it might be tempting to treat yourself to a luxury. Maybe your dream car or a long vacation? While it’s not necessarily wrong to use at least part of your inheritance for a little fun, make sure you don’t make an impulse decision about how to use your newly acquired funds. American retirees expect to leave an average inheritance of almost $177,000 to their heirs, and in several countries, that figure is much higher. An inheritance can be extraordinarily useful for your financial health, but it’s not something you can necessarily expect or completely rely on. And once you do inherit some cash, it can be difficult to know how best to manage it.
Above all, you’ll need to slow down and think about what’s best for you before you act. According to Consumer Reports, the very first thing you should do with your money is “park it.” People who blow through their inheritance in a short amount of time typically will either go on a spending spree or make bad investments, so this is one time when it can be better to save than invest, at least initially. Consumer Reports recommends putting the funds into an FDIC-insured money-market account to start. Putting the money in a checking account would make it too easy to spend. Another option is a 3-month CD with a penalty for early withdrawal, which will help prevent you from making any rash decisions.
After you’ve successfully parked your cash, you’ll be able to take some time to think through your options. At this point, some consumers will feel most comfortable consulting with a financial planner, but be choosy when it comes to selecting an adviser. Fee-only financial planners are recommended because they don’t work on commission, so they won’t try to sell you on investments you don’t need. Whether you seek the help of a professional or manage your inheritance yourself, here are three smart ways to use your funds to secure your financial health.
1. Save for emergencies
If you don’t have an emergency fund, this should be your top priority. While not all experts agree on exactly how much should be saved, six to 12 months worth of wages will give you a great cushion to deal with unexpected expenses or a possible job loss. A sizeable rainy-day fund is also great for surprise opportunities, like a last-minute vacation with friends. It could be tempting to use your inheritance to pay off your debts immediately, but without an emergency fund, you could be back in debt in no time.
2. Pay down debt
Paying off all high-interest debt, such as credit card balances and auto loans, is an excellent use of inherited money. The sense of relief you’ll feel after eliminating these burdens will be tremendous. Many consumers are less sure about whether to pay off a mortgage. This is not as cut and dry. In some cases, it can be wiser to put money toward your retirement before paying off a mortgage due to the tax deductibility of your mortgage. The decision will likely depend on how close you are to retiring, as well as the rate on your mortgage versus the returns you could expect by putting the money elsewhere.
3. Contribute to your retirement
If you have not yet contributed the maximum amount, putting part of your inheritance into a retirement account will help you work toward securing your financial future. However, that’s not to say those who expect an inheritance in the future should neglect their retirement savings. About two-thirds of Americans say the inheritances they receive will at least partly fund their retirement, and 10% say they will completely rely on their inheritance to retire. What you expect to inherit and what you actually receive could be very different, so until you actually inherit the money, it’s best to be proactive about saving for your retirement.
Ultimately, your plan for your inheritance will depend on where you are in life and your priorities. You may choose to put money toward your education or a child’s education, make some much-needed home repairs, open a health savings account, or purchase a reliable car to replace your old clunker. If you receive a large sum, you may choose to invest it a little at a time over many years. Most likely, your strategy will be a mixture of these. Just make sure you take your time in deciding what’s best for you in the long run.