Getting an inheritance can usher in a wide range of emotions.
On one hand, receiving inheritance money means that someone close to you has passed. The time after a loved one’s death can be an emotionally difficult and logistically stressful time for a person, whether or not the death was expected.
On the other hand, inheritance money can change lives for the better. Who hasn’t dreamed of getting a chunk of change to put toward their financial dreams?
It’s complicated when a positive event is paired with a negative event. Putting a plan into place could be a helpful antidote to the confusion and alleviate some of the anxiety around making a decision about the money—and may keep you from spending the money recklessly.)
When deciding how to spend or invest an inheritance, the first step is considering your options. From paying off debt to buying a home to investing the inheritance, there are many ways to deploy your new capital in ways to make it work for you.
Here are some ideas for those wondering what to do with an inheritance—how to think about the new money and how to invest your inheritance in your financial goals.
Prioritizing Your Goals
Receiving an inheritance could be a great reason to sit down and review your financial situation. Now may be the time to assess—or reassess—your current needs and priorities. Looking at your own personal financial statements—including income, expenses, assets, and liabilities—might be the easiest way to start.
Taking some time to think about your goals may help define your values and not only help you arrive at where you stand, but guide you as you determine the best course of action for investing the money. How you ultimately invest an inheritance will depend on the financial goal (or goals) for that money. Leveraging tools such as automated investing can help you consistently grow your portfolio over time.
Paying Down Debts
If you have debt, you may want to consider using your inheritance to pay those debts down or to pay them off totally. Not only could this have emotional benefits, but could also free up future cash flow by reducing your monthly expenses. It might also help you save money that may otherwise have gone to interest payments.
Paying Down Credit Cards
Currently, the average Annual Percentage Rate (APR) on a credit card is around 15% , with some cards charging as much as 30% for their penalty rate . It can be challenging to invest in such a way that consistently outpaces what you’re paying in interest on a credit card over the long term.
If your goal is to build wealth, then you may want to consider eliminating the source of debt that is costing you the most. For many people, this is their credit card debt.
While not an incredibly glamorous way to use an inheritance, there could be substantial emotional relief in paying off credit cards and getting off the minimum payment treadmill.
A reduced or eliminated monthly credit card payment may free up some of your monthly budget, potentially allowing you to save, invest, or spend on other goals. Never underestimate how good it feels to be free from credit card debt!
Paying Down Student Loans (or Other Debts)
Student loans are becoming an ever-increasing burden on young people. To some graduates, using an inheritance to pay down your student loans may sound like a pretty enticing deal, just to be done with it all.
There have now been plenty of studies that show student loan debt can negatively affect mental health. If you think eliminating some of your student debt would make you happiest, it is certainly worth considering.
To go this route, you may want to be strategic about which loans to pay off first. Interest rates on student loans can vary. Typically, federal student loans have lower rates than private student loans, though not always.
To be sure, start by checking the interest rates on each of your loans in order to determine which are costing you the most. Generally, it is recommended that private loans with higher rates are paid off first. In addition to lower interest rates, federal loans tend to come with protections and flexible repayment plans that may not be available through private lenders.
Before deciding to payoff your student loans, you might want to consider the opportunity cost. Generally, the interest rates on student loans are relatively modest compared to other types of debt and the long term historical return of the stock market.
Emergency Fund
Another way you may want to use inherited money is building up an emergency fund. Just like it sounds, an emergency fund is cash, held in a savings account, that’s available in the event of an emergency.
A financial emergency is a sudden, unexpected expense and could range from a car accident to a root canal. Having the liquid cash available to cover such an expense may help you avoid going into credit card or other debt in the future.
While it is ultimately up to you to determine how much money to keep in an emergency fund, you may want to consider having the recommended three to six months’ worth of expenses in the bank.
This amount may help cover you in the event you are laid off from your job and need time to find a new opportunity. You may want to keep your emergency fund in a savings account that you can easily access.
Investing
Down Payment on Home
There’s no denying the sentimentality attached to using inheritance money to buy a space of your own. If buying a home is a financial priority to you, there are plenty of ways to put inheritance money to use.
The first is by using this money as a down payment. Though a 20% down payment is no longer required by most lenders, a larger down payment could lower the monthly mortgage payment.
You may also want to have an extra cash buffer as you go through the home-buying process. It’s always possible that additional home buying costs may come up or that the process might be more expensive than predicted.
Home-buyers must be prepared for closing costs, property taxes, and home repairs. Also, both furnishing a home and home maintenance can be expensive, and you won’t regret having some extra cash on the side.
While purchasing a home is the right choice for some people, it’s good to keep sight of the fact that home values fluctuate depending upon market conditions.
If you inherited a house, you’ll probably want to make a decision about whether to keep it or sell it.
Kid’s College
The cost of college is growing faster than the rate of inflation. If you’re planning on helping your kids pay for school, you could consider using your inheritance to fund a college savings account or invest towards your child’s future educational costs.
This can be done through a 529 plan, a prepaid tuition plan, or a Coverdell education savings accounts. A 529 plan allows for tax-free investment growth when the money is used for higher education expenses.
Each state has its own 529 plan, but you’re not required to use the plan for the state for which you live. Some states may offer a state income tax deduction if you use their state’s plan, so check with the plan (or your tax advisor) to be sure.
Retirement
Saving and investing for your golden years could be an excellent use of inheritance money.
To do so, the first step is determining which type of retirement account to invest within. Unfortunately, it is unlikely that you can directly allocate this windfall to your workplace retirement account (like a 401k), because those contributions must come from your paycheck.
You may qualify to use a individual retirement account, or another retirement account—check with your tax advisor to see which account works best for you.
It should be noted that the contribution maximums to some retirement accounts are relatively small—$6,000 for a Traditional or a Roth IRA. No reason to fret—you can still save and invest for retirement, it simply won’t be in a specially designated retirement account that has special tax treatment. You may want to consider opening up an account at a brokerage firmor via an online trading platform like SoFi Invest.
Figuring out where the money goes is the first step. Then, it’s time to invest the money. If you would like help creating and maintaining an investment portfolio, services like SoFi Invest could be a great choice.
SoFi Automated Investing uses a portfolio of exchange-traded funds (ETFs) based on the investor’s goals, risk tolerance, and timeline. And best of all, there’s no fee for this service. For investors who are comfortable doing it on their own, SoFi Active Investing may be a better fit.
Making Thoughtful Splurges
Losing someone who was special to you is hard. Although prioritizing your financial goals should come first, you may find it soothing to take a small amount of money and use it to indulge a little.
For example, you might want to take a weekend trip to a favorite local vacation spot or eat out at a favorite restaurant of your loved one. This small act may make you feel more connected to both the person and the money you’ve inherited.
There is certainly a temptation to go nuts with new money, but you may regret emotional spending. Where you are on the path to meeting your financial goals will likely determine how much of the inheritance you set aside for fun money and how much is put towards those goals.
Donating to Charity
If you’ve received more than enough money to cover your financial goals and create streams of investment income for yourself (and possibly your heirs’ futures), you might choose to donate a sum to a favorite charity.
How much you give will likely depend on the size of the inheritance and how much will be necessary to set you up for success over the long-term.
Choosing Multiple Goals
Sometimes we mentally frame financial goals as “one or the other.” It doesn’t have to be this way, as most financial goals are not in opposition with one another.
Generally, financial goals boil down to one of a few ideas: building wealth and building additional income streams. If you would prefer to work on two or more goals simultaneously, that is certainly your prerogative.
Hiring Professional Help
If you’re feeling overwhelmed, don’t hesitate to hire help. You may want to begin your search with the person or people associated with the estate before it was passed along, such as the estate’s executor or a trustee.
That said, you’ll want to be certain that this person is a “fiduciary,” which means that they always act in your best financial interest.
You may decide to hire a Certified Financial Planner (CFP) to act as a fiduciary. There are several options for this: First, you can hire a CFP directly. You may also be able to access a CFP through an online investing service like SoFi Invest, where a CFP is available to answer your money questions at any time.
Whether you’ve inherited a lot or a little, SoFi Invest may be an option to invest in your financial dreams and, using your financial goals as a guide, may be the low-cost strategy you’re looking for. It could be the perfect solution for anyone wondering how to invest an inheritance.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
SOIN19153
