How to Use Your Inheritance Advance Wisely: Financial Planning Tips

Receiving an inheritance can be transformative. Even a modest estate can open up new financial possibilities, particularly if you have been struggling to save due to high living expenses. However, it’s essential to handle any financial windfall with careful thought and a well-structured plan.

Assess Your Inheritance

Your inheritance may include more than just cash; it could involve investments or property such as a home, car, jewelry, art, or personal items. Generally, you don’t owe income taxes on the inherited assets themselves, as there is no federal inheritance tax and few states have inheritance taxes. However, you may need to pay taxes on any income or profits generated from these assets later on unless they come from a tax-exempt source. For example, if you inherit a home and sell it, you would be liable for taxes on any increase in the property’s value from the time you inherited it to the time you sell it.

Pay Down Debt

Regardless of the size of your inheritance, applying part of it to pay off high-interest debt is generally a wise choice. Begin with your most costly debts, such as unpaid credit card balances, and then address other debts like lines of credit, car loans, student loans, or mortgages. Reducing these financial obligations can enhance your financial stability and overall well-being while also saving you money on interest payments over time.

Create an Emergency Fund

A wise approach is to allocate part of your inheritance to establish an emergency fund. This safety net can offer peace of mind and shield you from unexpected financial difficulties, such as incurring additional debt or having to sell investments at a loss.

Enhance Your Retirement Savings

Your inheritance is a great chance to strengthen your retirement savings. Think about increasing your contributions to tax-advantaged retirement accounts, such as IRAs or employer-sponsored 401(k) plans.

Purchase a Home or Other Real Estate

If you’ve struggled to save for a down payment in the past, your inheritance could enable you to buy your first home and start building real estate equity. If you already own property, consider the advantages and risks of additional real estate investments, such as rental properties or real estate investment trusts (REITs). Please seek advice from professionals to help you choose suitable properties and manage them effectively.