I Just Inherited Money! Now What?

Have you ever been the beneficiary of a nice little sum of money or some other inheritance? If so, you know deciding what to do with inherited money can be tricky, but it doesn’t have to be. Here are a few ideas on what to do with the unexpected cash — HINT: these tips can also be a good way to make use of your tax return if you get one!  

Recently I had someone call me and say, “Hey Justin! My grandma just gave us $20,000!” I’m like, “Holy cow! That’s amazing!” So after we go through all of the detail and memories, he wants to know smart options for using the new money.

A Financial Advisor’s Suggestions for What to Do with Inherited Money

This is the process I go through with someone that is lucky enough to receive a windfall:

1. Make a Charitable Donation

As a general rule when dealing with an inheritance, I recommend that you give 10% of it away. You were blessed with the inheritance; give some of it to somebody else! Maybe you’re a member of a church or philanthropic center. Perhaps you could give the money to an alma mater or an orphanage. Somewhere, you have something that tugs at your heart. Therefore, give something in the name of the benefactor who left you the inheritance.

RELATED READING: Five Ways Businesses Can Donate to Charity

2. Enjoy Some

After you give some of the money away, I want you to go out and spend 10%. Go out and blow it. Have fun! The loved one who left you that money wanted you to use the funds and enjoy them. Like I told my client who received the $20,000 from his grandma, take your wife out on a nice date! I’m talking about going to a nice restaurant like a Ruth’s Chris or a Flemings. Go all out! Take a little bit of it, and go treat yourself and your family. Go on a shopping spree, go on a vacation, or do some home renovations. Just spend some!

3. Start/Add to Your Rainy Day Fund

Then, check your cash reserves. Some people call it an emergency fund while others call it the cookie jar fund. The goal is to have three months of expenses saved if you have a two-income home and six-months of expenses if you are relying on one income. In my client’s case, he had enough cash saved to fully fund his emergency fund.

4. Clear Up Unsecured Debt

Next, look at your debt. When I asked my client if he had any debt, he told me he owed on his house, a car, and a credit card. Aha! Credit card! This is where you start – getting rid of unsecured debt. He told me it just had a 3% interest rate, but when he did a little digging, he found that it was actually 8%—those cards will get you every time! He told me he really wanted to invest the inheritance because he heard the stock market was booming, and he didn’t want to miss out on the ride. However, when you are in debt, you’re losing money. I told him he might make money in the stock market, or he might lose money in the stock market in the next few months or years. Yet, he can definitely make an 8% ROI if he paid off his credit card. He understood the message and elected to pay off the credit card.

Luckily for him, it didn’t take up the full amount of the inheritance. So we looked at the car loan, and it was at 0% interest. We decided we could deal with that and moved on to the last piece of advice.

5. Invest a Little

Finally, invest the remainder of the inheritance. In my client’s case, I suggested we split half of the remaining balance after paying off the credit card between his Roth IRA and paying down his car loan. So he contributed the maximum allowed in a given year into his ROTH IRA, and he applied the remaining balance to his car loan. This means he will have more money to invest later on because he eliminated some of the car debt, but he didn’t forgo plumping up his retirement either.

Next Step…

There you have it… this financial planner’s suggestions for using that “mad money”. Give 10% of it away. Spend 10% of it. Shore up your emergency fund. Pay off or pay down your unsecured debt. Then, invest whatever’s left. Seriously, if you get a big windfall, figure out what makes the most sense! And don’t forget Ruth’s Chris. Have you ever had a steak from Ruth’s Chris? Oh man, that thing comes out sizzling with butter! It’s so good! The only thing better than Ruth Chris is a good pizza — just saying! Make it a great Financially Simple day!

Listen to our podcast that gives you solid ideas for investing that inherited gift: IRAs, insurance, real estate, vehicles, and so on: Investing using Inheritance Money