When the loss of a loved one occurs, some find themselves with an inheritance they are unsure how to handle. Already in an emotional state following your loss, it can be easy to make a mistake with this fortunate gift. Many people feel overwhelmed, but there are ways to cope with the arrival of an inheritance and helpful tips in using it wisely.
Don't Act Quickly
The goal of an inheritance is to pass along family wealth or assets to help provide financial independence and stability to your future generation. However, most people go through an inheritance in just two years, some go through it even quicker. The first thing to do is avoid acting swiftly or irrationally upon receiving an inheritance.
Start with an Inventory of Your Financial Life
Take an honest look at your financial health and lifestyle at this point. Do you have adequate insurance to cover your health, your home, and/or vehicle(s)? What about high-interest debts and retirement accounts? According to Bankrate, taking an inventory of your life to determine these factors is an important first step that can help shape the rest of your actions as it regards the use of an inheritance.
As mentioned above, the most important thing to do is to avoid acting rashly. Do not rush to spend the money in any way until you have had time to look at and contemplate your financial situation. Even seemingly smart moves could leave you struggling later in life, so it is important to keep your individual situation (age, status, etc.) in mind. For example, paying off a mortgage now with an inheritance might leave you debt free in the future, but it could also leave you debt free and in poverty if you do not save adequately going forward.
Possible Actions with an Inheritance
Before you do anything, use the wisdom you have gained from the previous step to set some financial goals for yourself. This will help guide your actions with that inheritance. US News offers some insight on good uses of an inheritance, including:
- Paying off/down debts: Do not worry about good debts such as a home mortgage. Instead, focus on high-interest student loans or credit cards.
- Fund an emergency account: While you should not leave an inheritance in the bank to languish in a traditional savings account, there is nothing wrong with putting a portion of it there. A good rule of thumb is to have three to six months of living expenses covered by cash reserves.
- Fund your retirement: If you have not been fully funding your retirement accounts in recent years, now is the perfect time to do so. Let the money you received today work for you now and in the future.
Also, do not forget to have a little fun. Within reason, there is nothing wrong with treating yourself to a vacation or modest remodel around the home. Maybe it is time for a new car. Whatever it is, feel free to spoil yourself as long as you do not spend beyond 5 to 10% of what you received in the process.
Consult an Expert
Financial advisors are not just available to help you meet retirement goals. They also have the training and experience to help you handle a windfall such as an inheritance wisely. Contact Manhattan Ridge Advisors to help you develop a plan to maximize that inheritance, and even provide the guidance to stick to your long term goals.