According to Forbes, 78% of Americans live paycheck to paycheck. That is an astounding number. It means that the majority of working Americans are struggling to make ends meet and quite possibly don't have a financial safety cushion of any sort.
If you were to have a windfall come across your lap, what would you do with it?
Let's say you just inherited $100,000 from a relative. As someone who is living paycheck to paycheck, it may be all-too-tempting to splurge on all the vacations and worldly possessions that you've been craving for years. However, is that the smartest thing you can do for yourself long-term?
The next steps you take could potentially take you out of living paycheck to paycheck forever. It could even plant the seed of building generational wealth for your future children, grandchildren, and so on.
Inheriting a large amount of money comes with various financial paths and decisions, each leading to a unique outcome. Let's explore some of the smartest things you can potentially do with your newfound money.
What to do with a large windfall: 8 Top Tips
Below you will find some tips that financial experts and seasoned money pros agree are the smartest ways you can act upon inheriting (or winning) a large sum of money. Note that this list isn't exhaustive by any means. However, you generally can't go wrong when applying some or all of the tips below to make your newfound moolah last that much longer.
1. Don't Do Anything...Yet
It may be tempting to immediately start spending your inheritance on all the things you couldn't afford before. However, sometimes the most powerful thing you can do with a windfall is to do nothing.
Try taking a step back, reflect on the significant change in your circumstances, and let the news sink in. Allow yourself the time and space to process the emotions that come with this new chapter in your life. Take a moment to consider your options, seek advice if needed, and make a well-thought-out and rational decision that aligns with your long-term financial goals.
2. Fill Up Your Emergency Fund
Almost any money blog you can find will recommend you to build up your emergency fund, first and foremost.
An emergency fund is a critical component of attaining financial stability and freedom, providing a safety net for unforeseen costs like sudden medical emergencies or significant home repairs. This fund is like a financial shield, offering peace of mind and security during unexpected situations. Any time something unexpected comes up, you'll have a fund to fall back on instead of dipping into your retirement savings (which often comes with penalties) or racking up credit card debt.
Financial advisors often suggest maintaining an emergency fund equivalent to at least three to six months' worth of living expenses to ensure you are well-prepared for any unexpected financial challenges that may arise.
3. Say Goodbye to Debt
When deciding how to handle your inheritance, you may want to consider paying off any outstanding debt. Debt only grows with time, so paying them off in totality will nip that in the bud. Note that not all debt is created equal; if it doesn't make sense to pay off all your debt at once, then tackle high-interest debt such as credit card balances or personal loans. Doing this will not only boost your financial well-being, but it will likely also improve your mental health. Financial stress can cast a shadow over anyone's life, and alleviating that stress can be a game changer. Further, paying off debt and improving your credit worthiness will allow you to qualify for better loans in the future for big purchases, including auto loans or even a mortgage for a home.
4. Max out Retirement Contributions
Contributing to your retirement account is a smart financial move. While it may not give you that instant gratification, you're paying your future self.
By consistently saving and investing in your retirement fund, you are setting yourself up for a more stable and comfortable retirement. In the event of receiving a substantial sum of money, such as a large windfall, consider maximizing your contributions for the year to make the most of this opportunity. Not only can this action potentially lower your tax bill for the current year, but it also boosts your retirement savings, providing you with an added layer of financial protection and peace of mind for the years ahead.
5. Invest Your Money
For the remainder of your money, consider investing it wisely. Doing so can play a significant role in expanding your wealth over time and creating sustainable sources of passive income. By carefully considering various investment opportunities tailored to your financial objectives (and how much risk you can stomach), you can optimize the growth potential of your assets. Seeking guidance from a knowledgeable financial advisor can further enhance your investment strategy, ensuring that you make informed decisions aligned with your long-term financial goals. We provide a list of popular investment ideas in the following section.
6. Give Back
If you feel compelled, consider allocating a portion of your inherited legacy towards supporting causes or organizations that hold significant meaning to you. By doing so, not only can you create a positive impact in the world, but you can also pay homage to the memory of your loved one through meaningful contributions. (You can get some tax breaks, to boot.) However, it's important to remember to budget wisely and set limits on your donations to prevent any potential overspending.
7. Seek Professional Guidance
Inheriting a large sum of money can be overwhelming, both emotionally and financially. Seeking guidance from a financial advisor or estate planning attorney can help you make sound decisions and navigate any tax implications. It is better to take the time to plan and make informed choices rather than rushing into any major financial decisions. Remember, your inheritance is a valuable asset that can have a significant impact on your future, so it's important to handle it wisely.
8. Create a Money Plan, Including an Estate Plan
In addition to the above suggestions, it's essential to prioritize your financial goals and make a plan for how you want to use your inheritance. Whether it's paying off debt, saving for a down payment on a home, or investing in your future, having clear goals can help guide your financial decisions and ensure that your inheritance is used wisely.
Crafting an estate plan when receiving an inheritance is also an important step towards safeguarding your financial legacy and protecting your loved ones. This strategy ensures that your assets are distributed according to your wishes, thereby mitigating the risk of potential legal entanglements or family disputes that could devalue your legacy. Further, an estate plan allows you to potentially reduce the tax burden on your estate and maximize the benefits for your loved ones. Engaging in this process with a trusted estate planning platform like Trust & Will not only instills confidence in the security of your inheritance but also provides peace of mind in knowing that your loved ones will be cared for in case anything unexpected were to happen.
Great Places to Park Your Money
In the next discussion, let's check out some smart ways to handle your inheritance - keeping it safe and growing it over time. You can choose from simple saving accounts for stability, or dive into more adventurous options like stocks, bonds, and real estate. Each has its own perks and risks. Making wise choices in how you invest your inheritance could boost your financial well-being, setting you up nicely for the future.
Stock Market Investments: Purchasing shares of public companies can be a way to grow wealth over time, albeit with varying levels of risk depending on market conditions.
Real Estate: Investing in property, whether for rental income or capital appreciation, remains a favored option for many, offering potential for both passive income and long-term growth.
Mutual Funds and Exchange-Traded Funds (ETFs): These funds offer a way to invest in a diversified portfolio of assets without needing to manage each investment individually, which can be particularly beneficial for those new to investing.
Savings Bonds and Certificates of Deposit (CDs): For those seeking safer investment avenues, these options offer fixed returns over time, albeit typically lower than more aggressive investment choices.
Retirement Accounts: Contributing to retirement accounts like an IRA or 401(k) can provide tax advantages and serve as a foundation for long-term financial security.
Peer-to-Peer Lending: This investment allows individuals to lend money directly to others or to small businesses online, earning interest income in the process.
Take a No-Brainer First Step: Set up your Estate Plan in Minutes with Trust & Will Today
Having money fall into your lap through an inheritance is a bittersweet experience for most. It can bring sadness and excitement, and potentially even guilt for feeling remotely excited during the loss of a loved one. Remember to take the time to grieve and process the loss of your loved one before making any major financial decisions. Inheriting money may bring a sense of security, but it's important to also take care of your emotional well-being during this time. With the right mindset and guidance, you can use your inheritance to positively impact your life and honor the legacy of your loved one. So, don't rush into any major decisions and seek professional help if needed as you navigate this new financial journey.
One action you can take sooner than later is setting up your estate plan to begin the process of protecting your inheritance. Trust & Will offers an easy and affordable way to create your estate plan in just minutes. By setting up a Will or Trust, you can ensure that your assets are protected and avoid potential legal complications down the road. Plus, having an estate plan in place can give you peace of mind knowing that you have taken care of one of the most important aspects of successful financial planning. Not sure where to start? Take our quiz to find out how you can get started today.
Is there a question here we didn’t answer? Reach out to us today or Chat with a live member support representative!
Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.
Share this article