You just inherited a large sum of money. Now what? Whether it’s a few thousand, or a few hundred thousand, it’s important to make the most of your sudden windfall and leverage it to your financial benefit. Far too often, people who have a large sum of cash fall into their lap don’t take advantage of it. According to MarketWatch, one study found that one third of people who received an inheritance had negative savings within two years. So before you splurge on a new sports car or a tropical vacation, take time to evaluate your current financial situation so that you can maximize your inheritance for long-term financial security.
Pay Down Debt
One of the wisest ways to spend your inheritance is to pay off any outstanding debt. Whether it’s student loans, a mortgage or credit card debt, eliminating these payments from your finances will save you money in the long run. According to US News & Money, the first place to start is with debts that carry the highest interest rate, which is likely to be credit cards. It’s important to consider all tax angles, too. For example, since mortgage interest is deductible for taxpayers who itemize, you might be better off investing. It’s a good idea to speak with a financial planner who can evaluate your entire financial landscape and help you make the most of your inheritance.
Create an Emergency Fund
If you haven’t already started putting away money into an emergency fund, using your inheritance is a great opportunity to do so. An emergency fund can come in handy for the unexpected and unforeseen, such as losing a job, an expensive car repair or steep medical bill. A good rule of thumb is to put away four to seven months of living expenses into an emergency fund, according to BankRate.
Invest in the Future
Once you’ve taken care of debts and have an emergency fund established, it’s time to start thinking about the future. This could include a number of things such as retirement planning, setting aside money for your children’s college fund or a combination of the two. If possible, be sure to contribute the maximum amount into your retirement accounts each year. Investing in your children’s higher education is also a wise way to allocate your inheritance.