Making the most of an inheritance
By Peter Andrew
The very worst thing about getting older is that your family and friends do too. And that, naturally enough, means they begin to die in increasing numbers. I lost my best friend three months ago. And, over the last decade, both my parents have died along with a score of friends who were very dear to me.
Nothing makes up for such losses, but occasionally people remember you in their wills. Usually, you get some small memento, perhaps something you once admired. Rarely, a financial legacy comes your way, though usually only from close family members. Suppose you one day get a four- five- or six-figure check from a loved one's estate. What should you do with it?
Twist or stick?
Of course, that's entirely up to you. If the most happiness you can get from your windfall would come from a couple of days -- or a couple of hours -- at a blackjack, craps or roulette table in Las Vegas, I'm certainly not going to judge.
But most people probably want something different. Given that most of us lead fairly precarious financial lives, that may mean they want to buy themselves a little more security and a little less worry and stress. So what might your priorities be?
Some sensible choices
How much you can reduce your sleepless-nights count is going to depend on how much you inherited, and your wider financial circumstances. But there are some things that make sense for most people, though you might not manage them all. In order of importance:
- Eliminate or reduce your expensive debt. For most, this means getting rid of as much credit card debt as you can, preferably all of it. And if you're paying high interest rates on other forms of borrowing, by all means lose that too. Check loan agreements first to make sure any prepayment penalties are reasonable.
- Establish or extend an emergency fund. Experts recommend these funds contain enough money to keep your household afloat financially for three to eight months, and it's for you to decide how long would make you comfortable. Obviously, you should only access yours when there's a real need. It's important for you to be able to get to your money quickly, so you shouldn't tie it up in long-term or volatile investments. Most recommend high interest savings accounts or a money market account.
- Head off future spending. If you've been putting off expensive repairs to your home or car, or spending other money that could save you more in the long run, now might be the time to act.
- Top up. When are you more likely to be able to top up a kid's college fund or your own pension pot?
- Invest. On the morning this is being written, markets globally are in free fall. At times like this, it's particularly important to diversify your investment portfolio and to include some ultra-safe elements, such as bonds. Remember, any losses you make only become real when you sell, and if you can afford to sit out bad times, history suggests you could come out the other end just fine.
Of course, people in certain situations may have other priorities. For example, if you're currently renting and want to become a homeowner, this could be your big chance. The better your credit score and the bigger your down payment, the better mortgage rate you're likely to be offered. It's still a good idea to pay down each card balance to below 30 percent of its credit limit, because that should, after a while, boost your credit score.
If you're already a homeowner, you might want to think about reducing your mortgage debt. But, with low home-loan rates and tax relief on interest payments, the value of such a move is debatable. Think through whether it makes sense in your particular situation, and maybe take professional advice.
Chances are, the person who left you your inheritance took real pleasure in imagining the happiness it would bring you. So don't feel guilty about taking a luxury vacation or indulging yourself a little. It's your money now, so you should enjoy it, whether that means buying yourself extra financial security or blowing the lot on a Ferrari.
But whatever you do, don't make friends with me. You'd stand a better chance of living long enough to enjoy your money if you cuddled Typhoid Mary.
Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business, TheStreet and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.