What Should you do with a Surprising Inheritance?

what to do with inheritance

You have received an inheritance from a relative who has died and you wonder what to do with it. There are temptations to spend it on luxuries and things that will satisfy you for the short-term, but you don’t really need, because this is how people usually treat money they didn’t expect to get. But you, as a smart investor, should know better what to do with a surprising inheritance, and if you don’t, we’ll try to help you through an example.

The first step is to realize your current financial state; your loans, your obligations, and your income – and make calculated choices about what to do with that money, as it can help you much more than you think if you use it correctly.

# Know Your Financial State

To continue further, let’s make the following assumption about you:

  • You make $35K a year.
  • You have 0 savings.
  • You are a student who owes $40K in student loans over 5 years 0% APR.
  • You owe $5K in medical and credit cards.
  • 0 money towards retirement.

# The Steps

The good news is that you don’t pay tax for that $50K you inherited, as it is not considered income. You have a $50K net.

The first step is to pay off your credit cards. And try not to incur any more revolving debt.

Put 3 months of spending (in your case it should be around ~$3K) in saving accounts, Liquid Funds or Money Market Account (MMA). This will make sure that in any unexpected unemployment event – you have at least 3 months of liquid money to live from. The importance of saving is greatly explained here.

If your employer has a 401(k) or 403(b), fully fund it to the maximum extent % possible. Choose equities (stocks) funds from low-cost providers. if no employment retirement available, open an IRA, deposit the annual maximum (but do it in monthly installments). Invest most of the money in stocks (make it 80% stocks – 20% bond, you are young, but that depends on your risk tolerance). Once you start this program, never quit, and don’t pay any attention to “the investing news”.

As your student loan bears interest of 0%, it is recommended that you won’t pay it off. The rule of thumb here is that if you can get money with less interest than the rate of return you can get – take it.

# Summary

This money can help you become debt-free and put you on a path for success. However, if you aren’t careful, you could end up back in debt quickly. Learn how to make a budget, and make wise financial decisions.

*Every case should be considered differently.  You should conduct your own due diligence and consult your own financial advisor before making any investment decision.

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