Over the next 10 years, it is estimated that over $13 trillion dollars will pass to younger generations. This is an unprecedented amount of wealth transferring, but without proper planning, it might not provide the benefits that you may expect. If you inherit a large sum of money, you must understand how to manage and utilize this new financial opportunity. Not sure where to begin? Don't worry, we've got you covered. Keep reading to learn more.
Put The Funds in a High-Yield Savings Account
Inheritance is usually something you receive at a terribly emotional time. The death of a family member and acquiring funds from an estate can cause a flood of emotions ranging from sadness and uncertainty to worry, clouding the excellent judgment required to make vital financial decisions. Allow yourself time to analyze and postpone financial decisions until you've had time to comprehend your loss and talk with a trustworthy financial expert to prevent acting on impulse. Meanwhile, try placing the funds in a high-yield savings account or other investments that preserve capital, where it may earn more interest than a typical savings account. You may store your inheritance until you determine how to utilize it in the long run, or you can use it to go towards short-term priorities like buying a house.
Make or Add on to Your Emergency Fund
Professionals suggest putting money away in an emergency fund for three to six months worth of bills. Most Americans do not have this basic financial building block in place. You’ll be protected in the case of an unanticipated financial hardship, such as lost income, a medical problem, or another emergency. Consider putting these assets in their own high-yield savings account, where you can get to them quickly if necessary.
Make an Investment For Your Future
One of the most innovative ways to use your inheritance is your retirement. Consider filling your tax-advantaged retirement plan, such as a 401(k) or conventional IRA, to the maximum contribution allowed, including catch-up payments if you're above 50, if possible. If you've exhausted your retirement savings and wish to expand your investment portfolio, you can access almost any investment vehicle by opening up a taxable brokerage account. There are no limits to the deposits you make in a brokerage account. Common investments in a brokerage account may include:
Mutual funds: Mutual funds enable you to diversify your investment among various securities such as bonds and stocks. Professionals handle your assets on your behalf, investing in multiple businesses and industries to help reduce risk.
Exchange-traded funds (ETFs): You can compare ETFs to mutual funds in the way that you invest in a portfolio of stocks for diversification. However, ETFs are more accessible. Nevertheless, if you keep these funds for a long time, you will generally experience higher returns.
Index funds: An index fund is a form of a mutual fund or exchange-traded fund that monitors an economic sector to generate vast returns. The S&P 500 Index and the Nasdaq 100 Index are frequent index fund selections.
Individual stocks: Ownership of high quality companies can offer a great opportunity to build wealth over time. If you decide to acquire stock in certain businesses, be sure to maintain proper diversification because concentrated stock positions comes with potential risks.
Various Bonds: Bonds may be issued by corporations or governments and can be a reasonable way to build up an income stream based on the interest payments that the bonds pay.
Put Money Towards Debt
If you've established an emergency fund and invested enough to your 401(k) to receive the full matching contribution, paying off high-interest debt is one of the most effective uses for your inheritance. If you have a line of credit or installment loan with a high-interest rate, such as 20% APR, paying off that loan or line of credit may be the safest investment—and the profits are instant and large. You'll save a lot of money in interest over time, which you may use towards saving and making investments in the future. Just make sure you change your spending patterns so that you only charge products to your credit card that you can repay each billing cycle. Otherwise, you risk accruing additional consumer debt.
Start A College Fund
Think about putting some of your inheritance money into a college fund for your kids. Having the money to save for college may be stressful for families, and your inheritance provides a unique chance to stay on track and assist your children in avoiding student debt in the future. Not only will this reduce your future financial load, but it is also a method to reinvest your inheritance in future generations since paying for college can increase your children's lifetime earning potential. Consider establishing a 529 savings plan to house your college funds, which provides tax-free growth to help you save more for education.
Work With A Financial Expert
A financial advisor or other financial specialists, such as a certified public accountant or estate planning attorney, may assist you in making objective judgments about how to spend your inheritance effectively. They will assist you in defining clear goals and achieving them more quickly, which is especially important if you have little expertise in handling vast sums of money. Consider asking a financial advisor to assist you and help you control your inheritance. They'll have specific knowledge of the funds you've gained, and you'll trust their established track record of managing money right away.
Schedule A Consultation with an Experienced Financial Advisor
We hope this article has been beneficial to you and answered some of your questions about how to manage an inheritance. However, if you still feel like you need more guidance, we’re here to help. Our first priority at Fourth Avenue Financial is your overall financial success. We want to help you develop, implement, and monitor a strategy designed to address your individual situation to ensure all your investments are setting you up for a path of financial success. If you are ready to start planning for your financial future, we are here to help. Contact us today at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online: https://calendly.com/fourthavenuefinancial/introductory-zoom.
Securities are offered through J.W. Cole Financial, Inc. (JWC) Member FINRA / SIPC. Advisory Services are offered through J.W. Cole Advisors, Inc. (JWCA). Fourth Avenue Financial and JWC/ JWCA are unaffiliated entities.