Many people view an inheritance with mixed emotions. On one hand you are grieving for a loved one, but on the other, you are touched that your loved one planned ahead for your future. Loved ones often try to plan ahead for their heirs, and some inheritances may come with stipulations on the uses of the money, including how to invest it.
Planning how to invest an inheritance is similar to planning to invest any other available capital. But if the inheritance is considerably larger than your current lifestyle, or unexpected, then you may be tempted to go out and spend it.
But before you go buy that luxury car you’ve had your eye on, take a moment to analyze your financial situation, including precisely what you have and what is owed to you. While you may receive the money in a lump sum, it is more common to receive pieces of different investments.
Understanding Your Inheritance
Typically, you get what is referred to as a “stepped-up basis”, that means that the cost basis of the assets are dictated at the time of the persons death, not when the assets were originally purchased. This can significantly lower your capital gain, especially if the assets were purchased at a very low price.
In addition, you will not always receive all of the assets at the same time, making understanding what your have even more challenging. It is crucial, however, to know exactly how much your inheritance is, in what assets it is invested in, and what the cost-basis is in order to make the best decisions for your future.
Analyze Your Financial Goals
Decide what you want your money to do for you. Do you want it to fund your retirement, pay for kid’s college, or build yourself even greater wealth. Rank your goals in order of importance, and devote the largest chunk of money to your first priority.
Provided there were no stipulations for the use of the money, it is perfectly fine to splurge a little. Keep in mind, however, by investing wisely today, you are investing in your future financial health. Keep separate brokerage and bank accounts for each different investment goal, and when it is gone its gone.
Keep any capital in low-risk, accessible accounts if you think you may need it in the near future. CDs, savings accounts and money market accounts all work well for this purpose. Keep at least six months worth of expenses in one of these no-risk interest baring accounts.
Identify Your Long-Term Goals And Establish A Strategy
If like many people, your long-term goals include retiring with a comfortable nest egg, then investing your inheritance wisely is of the utmost importance.
When handling a fund earmarked for retirement, an age-appropriate mix of stocks and bonds will aid you in balancing capital appreciation as well as capital preservation. The stocks that are held in your portfolio should be dividend paying companies, with strong balance sheets to maintain an income stream should the market hit a rough patch.
It will be entirely up to you whether to utilize ETFs, individual stocks, or mutual funds to reach your investment objectives. If you have the time and interest it takes to research and track stocks, then stock picking may be right for you. If you are unsure as to where best to place your capital, or simple don’t care to devote the time to managing your own portfolio then there are brokerages, financial planners, investment advisers, and fund managers to help you along your way.
Always decide for yourself if something is worth investing in, no matter how simple your plan, or how great your manager. No-one is going to look out for you like yourself.