Many people in the United States can expect to get some type of inheritance during their lifetime, and some of those inheritances will be substantial. It is projected that over the next thirty years, many trillions of dollars will be passed to the next generation through inheritance. If you are one of the lucky people who inherit such wealth, it is definitely cause to celebrate; however, once that is over it is time to consider what should be the best way to handle the assets that you have inherited.
Initiate a Cooling Down Period
If you have inherited significant wealth, by all means treat yourself to something nice, but before you start to seriously spend your inheritance you should consider instituting a cooling-down period to consider your options. You should assess your retirement goals, short and long-term financial planning, and figure out how to maximize the wealth that you have inherited. One of the biggest pieces of advice given to people who inherit wealth is to not react emotionally and develop a financial plan of attack.
How to Develop an Inheritance Plan
Developing an inheritance plan is the best way to ensure that the money that you have inherited is being used in the best way possible. The plan can outline your financial objectives, potential pitfalls, and set you up financially in both the short and long-term.
Create a list of financial goals
You should sit down and really think about what short and long-term financial goals you have for yourself and your family members. In addition, consider any bad financial habits that you have had in the past that you should be aware of going forward.
Fund an emergency account
One of your top priorities for your inheritance plan should be to fund an emergency account with cash. Typically, it is recommended that you have an account with three to six months of living expenses in an emergency fund that you can tap into at any time. It can cover an unexpected loss of employment, medical expenses, and more.
Pay down existing debt
The next priority in your inheritance plan should be to pay down any existing debts. This can include education loans, mortgages, credit card statements, car payments, and any personal debts to others. By paying off your debts, you eliminate the interest that comes with the principal payments that can add on a significant amount to the original debt.
Save for retirement
Inheritance money is a great asset to use for retirement savings. You can use the assets to contribute the maximum to your 401(k) or IRA. Think about setting enough aside so that you can continue to maximize your retirement accounts until the time when you retire.
Have some fun
Finally, remember to save some of the money for yourself and fun purchases. Many estate planning attorneys and financial advisers recommend keeping five to ten percent of the inheritance for discretionary purchases. Like someone on a crash diet, it can be so much harder to accomplish your goals if you are giving yourself no leeway. Remember to treat yourself once in a while and enjoy what you have inherited.