Major life events come with major decisions to be made during emotional times. This can make it extremely difficult to decide the best way to manage the inheritance you received from a family member.
Fortunately, you shouldn’t be forced into any time sensitive decisions, so you are able to take a thoughtful approach to managing your newfound wealth.
Regardless of the amount of money you have inherited, you should understand the behavioral side of the equation.
People often treat money they have differently, based on how the money was received. This is referred to as mental accounting. For example, people will spend the $1,000 of earned income differently than the $1,000 that was inherited. You want to avoid making this type of behavioral mistake and focus on the bottom line number (not the source).
To start, you want to put the dollars you have inherited in a low-risk account, like a high-yield savings account. This account won’t earn you a lot today, but that’s not the point. The purpose is to give you time and a safe place to keep your money while you make decisions.
The next step will be to put together a financial plan. Take a look at the state of your current finances and find any areas needing attention. Do you have an adequate emergency fund to help prevent going into short-term debt? Do you carry a balance on your credit card? Do you have any unpaid medical bills?
After checking off your short-term needs list, take a look at longer-term opportunities. These could include boosting your retirement savings, paying down your mortgage, or simply investing in a taxable account for long-term growth.
As Tom Haverford (Aziz Ansari’s character on Parks & Rec) proclaimed - “Treat. Yo. Self.” Tom and his co-worker Donna would have a “Treat Yo Self” day every year, where they allowed themselves to indulge in any food, shopping, or other lavish experience for one day.
Be sure to carve out a small portion of your inheritance for quality of life, in other words - Treat Yo Self. Buy something that will bring joy to your life or will make your days a little easier. Take your family on a vacation or road trip. Whatever it is, be sure to have some fun.
Finally, after you have gotten your financial house in order, is there still money left over? You may consider charitable giving to be the best way to honor your late family member. Options may include giving to your family member’s favorite charity, setting up a Donor Advised Fund, or paying for someone’s college or medical bills directly to the institutions.
It’s never easy losing a loved one, but be grateful that they have provided you a gift to improve your life. The steps you take after receiving an inheritance will show your true values.