No matter the size of your inheritance, if you use the money wisely, it can make a major difference in your financial future. But, if you’re not careful, you can end up in the same financial position you started in, or an even worse one. Even if you want to use the money from an inheritance responsibly, what’s considered “responsible” isn’t always easy to figure out. Thankfully, there are a few simple strategies to keep in mind when figuring out what to do with an inheritance.
If you’re looking for assistance in creating a personalized financial plan, speak with a CERTIFIED FINANCIAL PLANNER™ professional at Good Life Financial Advisors of NOVA today!
Take Your Time
One of the best ways to make sure you use your inheritance wisely is not to rush into anything. Even the most responsible individuals can feel tempted to make major purchases when coming into an inheritance. Adding to the difficulty of making logical decisions is the mental state you may be in. If you’re receiving an inheritance, it’s likely you just lost someone you cared about deeply. Don’t feel like you need to make a decision about your inheritance immediately. While you don’t want to leave a lump sum sitting in a savings account for an extended period of time, a few weeks is unlikely to make much difference, and you’re definitely better off if those few weeks allow you to make more sound financial decisions.
Consider Their Legacy
Once you decide it’s time to make some decisions about your inheritance, the number of options may feel overwhelming. A helpful tool for making good decisions is keeping in mind the person who left you the inheritance. What legacy would this person want to leave behind? As someone who cared about you, it’s likely this person would have wanted this inheritance to have a positive impact on your life – such as paying off credit card debt, putting the money towards a mortgage, or creating or adding to a college savings plan for a child.
While you’ll ideally use the money in a way that benefits your financial future, there’s also nothing wrong with having fun with a little bit of the money. To make sure this is something that feels meaningful, consider doing something in memory of the deceased. For example, if you shared a love of travel with the deceased, you could use a piece of your inheritance to plan a trip you’ve always wanted to take.
Know How Taxes Will Affect You
One of the biggest concerns of those receiving an inheritance is how it will affect their taxes. The good news is that, in most cases, an inheritance has a fairly minor impact on your finances. The major tax implications that come along with an inheritance are known as estate taxes.
Estate taxes are paid by the estate of the deceased, and these come out before you inherit the money. The other taxes, such as inheritance taxes, are imposed after you get your inheritance. Only six states have a federal inheritance tax. Even in these states, family members such as spouses, children, and grandchildren are often exempt. An inheritance also usually doesn’t count as income, so it shouldn’t affect your income taxes. The only major area where you may end up paying taxes is if you inherit an asset that creates incomes, in which case capital gains may be an issue.
Get the Right Kind of Advice
When it comes to an inheritance, don’t be surprised if everyone has an opinion or a favor to ask. While everyone is entitled to state their opinions, unless they’re a finance professional, there’s no reason you need to take their advice. Likewise, people can ask their favors, but it is your choice what you do with your money. An inheritance comes with responsibility, and it’s your responsibility to decide what’s best for you. This is where working with a professional or team of professionals can be incredibly helpful. These people shouldn’t tell you what to do but should instead educate you on all your options.
Account for Every Dollar
The best way to waste an inheritance is to fail to create a plan for how you’ll spend it. A vague concept of how you’ll use your inheritance rarely works out as planned. Rather, figure out ahead of time where every dollar will be going. Though this may not sound as exciting as spending money however you wish, it can actually lead to more joy overall. When you know exactly how much you can have fun with, you can enjoy the spending of it far more than you probably could if you were stressed about your rapidly vanishing inheritance.
An inheritance can be exciting, but it can also be complex and emotional. If you make sure you know what to do with your inheritance, you can reap the benefits for years to come. For personalized advice, consider working with a CERTIFIED FINANCIAL PLANNER™ professional at Good Life Financial Advisors of NOVA.