It’s a problem more of us wish we had—inheriting some money after a relative’s death and deciding on the smartest way to use it. Most folks fall into one of two categories—set the money aside in a savings account or “rainy day fund” if you already have a savings, or use the money to pay down some of your debt.
Most beneficiaries are required to pay hefty inheritance taxes. Federal taxes must only be paid if the estate exceeds $3.5 million; however, each state carries its own tax amount that varies. Once the inheritance taxes are paid, the beneficiary must then decide what to do with the money that’s left. Obviously, the money should be used wherever it’s most needed, but depending on how much debt a person might have, the inheritance may only be a temporary solution to a bigger problem.
There are a few things to consider when deciding whether to save or use the inherited money:
“Will I possibly have to live on this money one day?” Let’s face it—none of us knows what the future might hold. Rather than go on a spending spree and clearing every last penny of the inherited cash out of the bank account, think things through a bit first. Can you afford to put some of the inheritance into savings (without it burning a hole in your proverbial pocket) and let it accumulate a bit of interest? A lot of folks take a great deal of comfort in the fact that “The money’s there if I/we ever need it.” Even $5,000 put safely in the bank can make a huge difference to a person’s peace of mind.
“Are my spending habits under control?” Going back to the inheritance being a temporary solution to a bigger problem—take a look at your debt and see if you can pinpoint how you got to where you are financially. If you’re carrying the usual debts like a mortgage, car payment, or student loans and stick to somewhat conservative spending habits, you might be better suited to use the inheritance to pay down some of what you owe. But if you have several hundred thousand dollars’ worth of debt weighing you down, you may want to get your spending habits in check first before you put your inherited cash toward drawing down your balance. Obviously, that $5000 you just received due to Aunt Gertrude’s passing won’t be much help toward the $80,000 (plus interest) that you already owe. If this is the case, see what corners can be cut in your monthly budget, and what unnecessary purchases can be cut out entirely.
“If I have the amount I inherited in savings already, would I go into debt to avoid spending it?” This ties in with having reasonable spending habits. You may already have a fairly healthy savings account; if this is the case, what would you consider a “necessary” expense? Would you rack up debt you may not have now in order to make a large purchase like furniture or a car, rather than to dip into your safety net (your inherited savings account)? If you’re normally a frugal spender, you may have a clear plan for how you’ll be getting the most out of your inheritance as possible.
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