What to do With an Inheritance?
In many households, nearly every penny is already spent before it is even earned.
The typical household budget that covers the cost of supporting a family, paying off debt, and saving for retirement usually doesn’t leave much room to spend on luxuries. However, if you are lucky, you may receive money unexpectedly, your family may have received an inheritance, you may have gotten a bonus at work or you may have just been benefited with some other type of additional income.
If you ever get a ton of money or a very large payment it can be tempting to spend it all on that red convertible you’ve been fantasizing about or take that dream trip to Hawaii. Unfortunately for many, newly made money has the potential to quickly disappear without a trace. Rarely are there strategies in place to spend that kind of money wisely.
If you receive some kind of unexpected bonus, before calling the travel agency take a deep breath and consider these three situations first.
Taxes and other expenses
If an unexpected large sum of money comes your way, your arrogant decision might be to look at your wish list and see what you can buy first. But before you make plans, what you should know first is that you will have to set aside a part of the money to pay taxes. You may want to review it with an expert, an accountant or a tax advisor they may have ideas on how to reduce the amount to pay.
If you suddenly become the owner of a new home as part of an inheritance, something to consider is how much you will be able to keep it. If you want to keep that car or house (any other item of high monetary value), make sure you can upload its maintenance, insurance and loan payments if the object has not been paid yet.
Pay your debts
If you have any debt, you will hardly find a better place to put your inherited money. Once you have paid taxes and other expenses involved with an inheritance. It would be very helpful to attack your own debts in the suggested order:
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- Credit card debt: This is commonly the debt with the highest interest rate and is normally not tax-exempt. Pay your credit cards first.
- Personal loans: Pay these later. You and your friend or family member will be happy for you to pay off the debt at once
- Car Credit: The interest rates on car loans are lower than those on credit cards, but cars devalue faster (very fast). Rule of thumb: If you can avoid it, try not to pay interest on items that depreciate quickly. Pay for the car as fast as you can.
- College loans: College loans typically have tax-deductible interest, but there is no physical asset with intrinsic value attached to it. Pay them as fast as you can.
- Real estate loans: Many times the interest on mortgage loans is also tax deductible. But since the cost of your home usually rises over time, it might be better to put your money elsewhere if necessary rather than paying off the home loan too early.
Create an emergency fund
Before you buy that red convertible, be sure to set aside some money for the lean cows. Saving up to six months off your average monthly expenses is a good goal. These could be as liquid funds or a separate savings account.
Save for retirement
With taxes covered, your debts paid, and an emergency fund added, now is the time to think about saving money for your retirement day. Talk to a financial expert to help you create the best strategy for you and your family.
Start that fund for the University
If you have children and you have not been able to have the opportunity to invest as much as you want in their education, saving a little money for this purpose may be the most logical thing to do. Again, a financial advisor can recommend the best strategy for this purpose.
Indulge yourself
Now you are ready to sink your feet in the sand and enjoy new experiences! Maybe you and your family have always wanted to visit an amusement park or vacation on a tropical island. If you have responsibly taken care of everything mentioned in the previous paragraphs and there is still some money left. Come on indulge yourself.