Manage Your Inheritance Carefully
A common question that people face is how to best deal with an inheritance. Should they put a down payment on the house they have been wanting? Buy the car they have been wanting but couldn’t afford?
Is it best to pay off debt? Or is it better to invest for the future?
Everyone’s situation is different, but one thing is sure. You want to make decisions with an inheritance that will improve your financial picture and not make it worse in the long run. That may sound strange how could a windfall make your financial picture worse?
An example would be using an inheritance to put a down payment on a house that you are not ready to afford and end up with debt that becomes a burden in years to come.
Take a look at this advice from Dave Ramsey about making decisions regarding your inheritance. I hope they will be helpful should you face this situation.
Here’s the deal:
When a loved one dies, you are not thinking clearly enough to make major financial decisions. Instead of making a rash decision, park the money until you are ready. It won’t hurt to allow the money to sit in a checking or savings account for a few months while you grieve.
When you are ready, develop a plan. How will this inheritance best bless your life? Can you change your family tree? If you use it to pay off debt, will you have a fresh start? Are you debt-free and ready to invest the money and let it grow?
The absolute most important thing is to know why you are doing what you are doing. That doesn’t mean you need to take six finance classes and watch five hours of financial shows every day. But do some reading. Find a financial advisor with the heart of a teacher—one who will explain investing as many times as you need them to. Don’t do anything unless you understand why.
It’s okay for the plan to include some fun. There are only three things you can do with money: spend, save and give. Make all three part of your plan. Just have a plan before you do anything with your inheritance.
Pay Down Debt or Invest
Once some time has past and you can think more clearly about important decisions, the most common places that people plan to use an inheritance is to pay down debt or invest for the future.
What would you do if you inherited a sum of money next month? Would you struggle with the question and not be certain which is the best decision?
Here is an answer to the question of whether to pay down debt or invest that may surprise you.
First Things First: Make Sure You Have a Savings Cushion
The question involving windfalls, and particularly inheritances, is almost always between paying off debt or investing. I would suggest that there is a third option that can’t be overlooked in a lot of cases.
Before you either pay off debt or invest for the future, the first thing you need to do is to create a cash cushion for the present.
One of the biggest reasons for financial stress – and even for the inability to achieve long-term financial independence – is a lack of liquidity. The absence of any kind of liquid savings forces you to rely on debt any time there is a cash shortage.
It doesn’t take much imagination to realize that an absence of savings is a surefire recipe for a lifetime on the debt treadmill. Unfortunately, it starts early with most people. Because they never have a basic savings account, credit dependency becomes a lifestyle. Debt can suck the life out of your finances, because it represents a perpetual drain on your income.
In addition, having enough savings to cover your living expenses for a few months will do more to reduce financial stress in your life than just about any other single strategy. It eliminates worry over an unexpected expense, or even a temporary loss of a job.
For all of those reasons, my recommendation would be to first make sure that you have enough money in a savings account or money market fund to cover your living expenses or at least three months. That will give you the breathing room that need to do everything else. – Good Financial Cents
Have you ever thought about what to do with an inheritance in the event you receive one?