Having a family member or close friend pass away can be a very emotional experience. Things can become even more complicated when money is involved. Leaving an inheritance behind can be someone’s final way of telling their loved ones that they care about them, and you will want to use this gift wisely. Here are some things to think about when deciding how to spend an inheritance:
Do I have any high interest debt?
If you have a large debt, using an inheritance to pay it off could be a great idea. If you have multiple debts, for example credit card debt, a mortgage or student loans, you will want to look at the interest rates on each. The higher the interest rate, the quicker you will want to pay that debt off as it will cost you more money in the long run. Credit cards are usually the best example of this as interest rates are typically very high.
Do I have an emergency fund?
These are typically a few months’ worth of expenses that are in a readily accessible account. They can cover any unexpected expenses that may come up in order to avoid putting yourself into debt. Whether you have an emergency fund that could just use a little boost, or you don’t have one at all, this can be a way to utilize that inheritance.
Do I have any large expenses coming up?
It is a good idea to look into the near future and think about any larger expenses that may come up. Whether it is putting a new roof on your home, or maybe your children are getting ready to go off to college, an inheritance can go a long way.
Should I invest it?
Another option would be to invest the money you have inherited for the future. This can be especially useful in catching up if you have had to cut back on retirement savings. If you aren’t strapped for cash, and don’t see yourself using the inheritance for any large purchases coming down the pipeline, this can be another great use.
My colleague, Andrew Baron, CFP®, EA, dives deeper into some of these options on an episode of his podcast, Well… It Depends! – “What Do I Do With an Extra $10,000.”
Receiving an inheritance can be a blessing, but may also leave you with the curse of “now what?” It is important to think your options through and weigh them accordingly. As long as you do this first, the right choice should present itself.
