Inheritances – no matter the size – can have a substantial impact on you and your family’s financial status. What should you do when you come into sudden wealth? Should you buy a new car, or maybe splurge on your dream vacation home?
While it may be tempting to use your new found capital to “keep up with the Joneses,” it is vital to first evaluate your current financial status and take practical steps to ensure financial stability.
Save for Retirement: Whether you’re in your 20s or your 50s – retirement is a lot closer than you think. Contributing a portion of your inheritance to your 401(k) or Roth IRA can help ensure that you’ll be able to live comfortably during the golden years of retirement.
Pay Off Debt: Receiving an inheritance can be a blessing when you’re looking to pay off student loan, credit card, or other high interest debts. If you’re already feeling good about your retirement savings, think about paying down balances to help get back on solid financial ground and keep debts from becoming a financial burden down the road.
Invest in Your Child(ren)’s Future: As the cost of higher education continues to skyrocket, it may be helpful to use your inheritance to help finance your child’s education. Once your children have earned their degrees and enter the workforce, consider encouraging them to repay the money that was put towards their education, or contribute it to their future child’s college fund.
Create a “Rainy Day” Fund: Studies show the average American household doesn’t have enough money saved to cover a financial crisis like a medical or home emergency. Contributing to an emergency or “rainy day fund” that covers at least six months of expenses will provide a sense of ease if, and when, you face these financial crises. Already have a fund? Adding to it will only provide a greater sense of financial security.
Make a Charitable Donation: Donating a portion of your inheritance to a charitable organization can be a fulfilling way to use your new wealth. Consider making a contribution in honor of the person who left you the inheritance. Making a larger donation to a cause they were passionate about could be a way to ensure their memory lives on.
Treat Yourself: Have you been daydreaming about that family cruise to the Caribbean? Or maybe you’ve had your eye on a new leather jacket but haven’t felt comfortable splurging? Once your debts are paid and you’re feeling secure about your financial future, treat yourself (and your family) to something nice. Just be careful not to overindulge, as luxury items can quickly add up.
Inheritances, while a generous gift, can be a complicated matter. Consult with your planner to build a plan for your inheritance that fits you and your family’s financial needs.