Smart Ways to Deal with an Inheritance

All fun and no plan make Jack a poor boy

The sudden wealth of inheritance is often a two-edged sword. On one side there is the sorrow of bereavement, the pain of having lost someone for whom you cared deeply. On the other, there is the excitement, the confusion, the what-do-I-do-know of having been gifted a whack of cash.

Perhaps the most important step is to take a deep breath. It will be difficult to know how best to deal with your sudden wealth while you're still emotionally wrought, so don't even try. Give yourself some time to grieve. Just stick the money in a money market fund for the next 90 to 120 days.

Even if your emotional attachment was minimal - your Great Aunt Lucy who you haven't seen in 20 years leaves you all her worldly possessions, including her $250,000 worth of stock - you should take a few weeks to think about how you'll put the money to work. The heady feeling of being rich needs some time to dissipate before you'll be capable of making sound decisions.

You know that pile of bills that's been gathering in the bottom draw of your desk? Get `em out and pay up. Ditto those credit card balances, personal lines of credit and even your mortgage. The single best investment you can make in your financial future is to rid yourself of your debt. Paying off a $5,000 balance on a credit card that charges 17 percent in interest can mean a savings of up to $850 in interest in just one year. Prepay your mortgage with just $10,000 on a $100,000 mortgage amortized for 25 years at ten percent and you'll save up to $52,223 in interest. Wow!

Now that you're rich, buy yourself some peace of mind by setting aside the equivalent of about six months' income for your new emergency fund. There, doesn't that feel good?

Now look at your spending plan. You know all those things you could never afford to do before... hey, you can do some of them now. Careful though, money tends to be absorbed into a spending plan as easily as water in a desert. So set some limits.

If you've been pining for a home of your own you'll be tempted to rush out and buy a house. The thing to watch here is that you don't figure you're so rich you can afford to buy that 6000 square footer, particularly if it comes with a whopping mortgage. Focus instead on putting as much of a down-payment as you can on your castle (definitely no less than 25 percent down), instead of trying to buy the most expensive home possible.

Time to look to future needs too. Your kids will still need a university education - but now you won't have to go into hock for it. And you'll still need a retirement plan - this is a perfect opportunity to catch-up all that unused contribution room. You might want to start a new business. Or you might decide to become an investor, and grow your fortune. Make sure you educate yourself about the options before you decide where to plunge your money. An advisor, one that's come highly recommended or that you've worked with and trust, would also be a worthwhile investment.

Sometimes people who have inherited money consider it an opportunity to do away with their life insurance premiums. This may be shortsighted; tax planning is particularly an issue for those with money and insurance is a great offset for taxes owed at death. If your insurance needs analysis shows you have enough capital to pay off all your debts, provide for your children's education, pay your final taxes, and provide enough income to support your family comfortably, then you may not need insurance. But if you're thinking about investing the money in a business or in some other endeavour where there is a chance the money won't be there should you die prematurely, you must keep, and may even need to upgrade, your insurance.

If you plan to pass on an inheritance to your own children, you'll need to do some estate planning: a new will, powers of attorney (if you haven't got them yet), and perhaps a trust or two. And, of course, you'll be wanting to do some educating too. After all, your children should be well versed with the ins and outs of how to put money to work for them so they don't blow their inheritance in no time flat. The way you handled your sudden wealth will help as a model when their time comes to enjoy their inheritance.

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