What to Do With a Small Inheritance
Navigate your small inheritance with practical guidance. Learn how to make informed decisions for lasting financial benefit.
An inheritance offers an opportunity to strengthen your financial foundation. This article provides practical guidance on making informed decisions about a small inheritance.
Addressing Immediate Financial Needs
Managing an inheritance begins with addressing immediate financial needs. Prioritizing these elements improves financial stability and reduces future stress by eliminating costly obligations and building a secure buffer.
High-interest debt, like credit card balances or personal loans, should be a primary target for repayment. Credit card APRs can range from 20% to over 28%. Paying down these debts reduces interest paid, providing a guaranteed return and freeing up monthly cash flow.
Establishing or bolstering an emergency fund is another foundational use of inherited money. This dedicated savings account covers unexpected expenses like job loss, medical emergencies, or unforeseen home and car repairs. Financial experts recommend saving three to six months’ worth of living expenses to prevent new debt during difficult times.
Beyond debt and emergency savings, consider critical, overdue financial obligations or necessary repairs. This includes essential car maintenance or home repairs like a leaking roof. Addressing these issues proactively prevents larger financial burdens and provides peace of mind.
Exploring Saving and Investment Options
Once immediate financial needs are addressed, explore saving and investment options to help your inheritance grow. The goal is to make your money work for you through strategic allocation.
High-yield savings accounts (HYSAs) offer a secure place to store funds while earning higher interest than traditional accounts. As of August 2025, some HYSAs offer APYs from 4.30% to 5.00%. These FDIC-insured accounts are low-risk options for accessible savings, suitable for funds needed within a few years.
For long-term growth, consider contributing to retirement accounts like an Individual Retirement Arrangement (IRA). Both Traditional and Roth IRAs offer tax advantages. For 2024 and 2025, the combined contribution limit for all IRAs is $7,000 for individuals under age 50, and $8,000 for those age 50 or older. Traditional IRA contributions may be tax-deductible, with earnings growing tax-deferred. Roth IRA contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
Beyond retirement accounts, low-cost index funds and diversified mutual funds are effective investment tools. Index funds mirror market performance, while mutual funds are professionally managed portfolios. Both provide broad market exposure and diversification, reducing risk. These funds often have lower expense ratios, allowing more money to grow through compounding over extended periods.
Funding Significant Life Goals
After addressing immediate needs and establishing savings, an inheritance can advance significant life goals. This aligns funds with personal priorities for long-term well-being and security.
Contributing to a home down payment is a common use of inherited funds. A larger down payment reduces the amount borrowed, leading to lower monthly mortgage payments and potentially avoiding private mortgage insurance (PMI). Down payment requirements typically range from 3.5% to 20% of the purchase price.
Funding educational pursuits for yourself or a family member invests in human capital. This includes tuition for college, vocational training, or professional certifications that enhance career prospects. Education can lead to increased earning potential and personal development.
Making a significant purchase with a long-term purpose is also a judicious use of inherited money. This might involve acquiring a reliable vehicle or home improvements that add value, like a new roof or energy-efficient windows. These purchases focus on practical benefits and long-term utility, distinct from luxury items.
When to Seek Professional Guidance
Consulting a financial advisor or qualified professional can be beneficial when navigating an inheritance. They offer expertise to optimize financial decisions, especially with tax implications or investment planning.
Complex tax implications often warrant professional input. While federal estate tax exemptions are high ($13.61 million per individual for 2024), some states levy their own inheritance or estate taxes. Inherited retirement accounts have specific distribution rules and potential income tax consequences that a tax professional can explain.
Specific investment goals beyond basic savings may also benefit from an advisor’s expertise. If considering sophisticated strategies, trusts, or integrating the inheritance into an estate plan, an advisor can provide tailored recommendations. They help create a comprehensive financial plan aligned with your objectives and risk tolerance.
When seeking an advisor, look for credentials like Certified Financial Planner (CFP®) and confirm they operate as a fiduciary. A fiduciary is legally obligated to act in your best interest, providing unbiased advice. Advisors may charge fees hourly, as a flat fee, or as a percentage of assets under management.