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 how to spend 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 what to do with the new money.
This is the process I go through with someone that is lucky enough to receive a windfall.
First, I asked him if he had 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 this particular case, this individual had enough cash saved to fully fund his emergency fund.
Next, I wanted to know if he had any debt. He said, “Yeah, I got a little bit.” I then inquired what exactly he owed money on. He told me his house, a car, and a credit card. Aha! Credit card! This is where we start. He tells me it just has a 3% interest. I said, “Are you sure about that?” I encouraged him to check it and give me a call back. When he did, he told me it was 8%—those cards will get you every time! He tells me he really wants 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 we might make money in the stock market or we might lose money in the stock market in the next few months or years. However, we can definitely make an 8% ROI if we pay the credit card off. 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 0% interest. We decided we can deal with that and moved on to the next piece of advice.
In his particular case, I suggested we split half of the remaining balance after paying off the credit card between his Roth IRA and paying down the car significantly. So we contributed the maximum allowed in a given year into his ROTH IRA and we applied the remaining balance to his car loan. This means he will have more money to invest later on because we eliminated some of the car debt, but we didn’t forgo plumping up his retirement either.
Now, one little thing I suggested to him, that most planners might not, was to take his wife out on a nice date. I’m talking to a nice restaurant like a Ruth’s Chris or a Flemings. Go all out! Grandma didn’t give it to you to not enjoy it! Take a little bit of it and go treat yourself nice. And that’s what they did! Enjoyed a Ruth’s Chris steak dinner and went on a little shopping spree.
Many times, people are so worried about the future, we forget to live. So play a little bit once you’ve checked off the other major boxes!
Make sure the emergency fund is in place, Pay down some debt. Invest a little in retirement and go out to a very, very nice restaurant! Have you ever had a steak from Ruth’s Chris? Oh man, that thing comes out sizzling with butter! It’s so good it makes your tongue want to slap your brains out! Seriously, if you get a big windfall, figure out what makes the most sense! And don’t forget Ruth’s Chris. The only thing better than Ruth Chris is a good pizza—just saying! Make it a great Financially Simple day!