As we age, it becomes more likely that we will inherit money. It can be from a parent, grandparent or even a close friend. The circumstances in which you inherit money can be trying enough. Don’t let inheriting money cause you any additional stress.
This article will discuss the first steps to take should you inherit money.
Don’t Do Anything
Give yourself time to digest and reflect. There is no reason that you need to make any decision immediately. The only thing you should do is to deposit the funds into a savings account. Since most savings accounts pay very little interest, it is not necessary to shop for the best rate. In other words, don’t let researching for the best interest rates stop you from depositing the money. As long as the bank is FDIC insured, your money is safe.
Assess Your Situation
After you have a little time to reflect, access your situation. Ask yourself these and other questions about your current financial situation:
- Do you have outstanding debt such as credit card, auto loans, personal student loans? If so, what are the balances and the interest rates on them?
- Do you have an emergency fund?
- Are you anticipating any of the following in the next two years:
- Needing to buy a new car
- Sending your child to college
- Expecting a new baby
- Getting married
- Replace appliances for your home, i.e. refrigerator, hot water heater.
- Other home improvements
- Any other large expenditure
- Have you funded your retirement savings this year?
- Is there something or an experience that has been on your bucket list?
Be honest with yourself about your situation and spend time reflecting. It is important to clearly and completely understand your financial situation. This includes preparing your net worth, cash flow, income statements along with a list of all your outstanding debt and their respective interest rates. If you cannot prepare this information on your own, then seek a trusted professional, such your accountant, attorney, or a professional financial counselor.
Write down, in order of importance, the plans you are considering. Make sure to include something you enjoy. Perhaps splurging on a spa day or a new car. Something you would not normally spend money on. Temper how much you plan to spend based upon your assessment of your situation. Meaning if you inherit $15,000 and you owe $20,000 in credit card debt, don’t spend all of the inheritance on a luxury vacation. Instead, put aside $500 for a fun activity and use the remaining $14,500 to pay off the debt.
Take Your Time and Rework Your Plan
We all need time to adjust to a change in circumstances. It cannot be emphasized enough. For some people, this may be the only time you will receive any inheritance. Don’t let anyone push you into making decisions before you are ready.
Word of Caution
You may have friends or relatives that want to offer you advice. Listen to their suggestions, they may have helpful insight. But don’t follow their advice if it is not right for you.
Perhaps this is not necessary, but it would be remiss not to include. Be cautious of anyone who claims they can grow your money at a ridiculously high rate. Stay away from scams. Even if you keep the money in a FDIC insured savings account (which is not recommended), you will not lose your principal.
Inheriting money can make a difference in your financial life. It is important to give yourself the proper time needed to fully assess your situation before making any monetary decisions about spending and saving the inheritance.
If you have received an inheritance, what did you do with it? How did you decide what to do with it?