What Should I Do With a $20,000 Inheritance?
Received a $20,000 inheritance? Learn how to thoughtfully manage your new funds, making informed choices for your financial future.
An inheritance offers a significant financial opportunity. Approaching this influx of capital with a deliberate and informed strategy is important to ensure its effective use. This article will explore various avenues for managing an inheritance, focusing on options that can help secure one’s financial future.
Initial Steps After Receiving an Inheritance
Upon receiving an inheritance, it is prudent to take time to process the new financial situation before making any immediate decisions. The emotional aspect associated with an inheritance often necessitates a period of calm reflection to ensure a rational approach to financial planning. Hasty choices made under emotional influence may not align with long-term financial well-being.
Understanding the general tax implications is another early consideration. Inheritances are not considered taxable income to the recipient at the federal level in the United States. While the deceased’s estate might have been subject to estate taxes, this is handled before asset distribution, meaning the inheritor does not owe income tax on the amount received.
Seeking guidance from a qualified financial advisor can provide tailored insights specific to one’s personal circumstances. These professionals can help navigate the complexities of financial planning and offer strategies that align with individual goals. Consulting an advisor can be a beneficial initial step in developing a comprehensive financial plan for the inherited funds.
Prioritizing Your Financial Foundation
Establishing a strong financial foundation is a primary consideration when managing an inheritance. Addressing high-interest debt can provide an immediate and tangible benefit. Debts such as credit card balances or personal loans often carry high annual interest rates, making them expensive. Using a portion of the inheritance to eliminate these debts effectively provides a guaranteed “return” equivalent to the interest rate avoided, without any investment risk.
Building or strengthening an emergency fund is another foundational step towards financial security. Financial experts recommend maintaining an emergency fund capable of covering three to six months of essential living expenses. This fund acts as a financial safety net, providing protection against unexpected events like job loss, medical emergencies, or unforeseen home repairs. Utilizing inherited funds to fully establish or significantly bolster this reserve offers peace of mind and reduces reliance on high-cost credit in times of crisis.
Beyond immediate debt and emergency savings, a portion of the inheritance could also be allocated to short-term savings goals that are essential or imminent. This might include saving for a necessary vehicle replacement, a significant home repair, or an upcoming large deductible. Addressing these near-term financial needs can prevent them from becoming larger financial burdens in the future.
Exploring Investment Opportunities
Once a solid financial foundation is in place, exploring investment opportunities can help an inheritance grow over the long term. Contributing to tax-advantaged retirement accounts, such as an Individual Retirement Account (IRA) or a 401(k), offers significant benefits. Traditional IRAs and 401(k)s allow pre-tax contributions that can reduce current taxable income, with earnings growing tax-deferred until retirement withdrawals. Alternatively, Roth IRAs allow after-tax contributions, with qualified withdrawals in retirement being entirely tax-free.
Beyond retirement accounts, a general brokerage account provides flexibility for investing in a wider range of assets. These accounts allow individuals to purchase stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Brokerage accounts provide liquidity and control over investments for various financial objectives. Diversifying investments across different asset classes can help manage risk while pursuing growth.
Using a portion of the inheritance for other long-term savings goals through investments can also be beneficial. For instance, a 529 plan is a tax-advantaged savings plan for future education costs. Contributions to a 529 plan grow tax-free, and withdrawals are also tax-free when used for qualified education expenses. Similarly, investing for a future home down payment in a conservative growth fund could help accumulate the necessary capital over several years.
Utilizing for Other Goals
Beyond traditional financial planning, an inheritance can also be utilized to achieve personal or aspirational goals. Investing in personal education or skill development can yield significant returns by enhancing career prospects and earning potential. This could involve enrolling in a professional certification program, taking specialized courses, or pursuing an advanced degree.
A portion of the inheritance might also be allocated to a meaningful purchase. This could include significant home improvements that add lasting value, the purchase of a reliable vehicle, or a planned travel experience. Thoughtful spending on such items, rather than impulsive splurges, can provide lasting satisfaction and improve daily living.
Finally, individuals may consider donating a portion of their inheritance to a charitable cause. While not a financial return, contributing to a non-profit organization can offer a sense of purpose and social responsibility. This act of giving can align with personal values and create a positive impact beyond one’s immediate financial situation.