How to make the most of an inheritance?

A few months ago, a client introduced me to her sister-in-law. The moment I met her on our first appointment, I could tell that she was upset. She went on to tell me that she had recently lost a very close relative. This relative had left her a considerable sum of money as an inheritance. My client was overwhelmed and was not thinking clearly enough to make major financial decisions (like most people going through huge life changes).

Many of us at some point or another will inherit money from our loved ones, or may come across a lump sum of money in a different way, such as a redundancy. 

As you start thinking about what you want to do with the lump sum, it's important to remember where it came from. The amount of hard work and sacrifice it took to build up that lump sum.

Keeping this in mind will make you more responsible and will help you to use the funds more impactfully, in a more positive way.

Here are my top tips when receiving a lump sum.

? Make plans swiftly, while you still have the money!

Sure, take your time to settle into the fact that you have this money, and spoil yourself initially with some things you had been meaning to do. But don’t let it get out of hand. We all know how quickly money can disappear with a lack of planning.

? Firstly, clear off any expensive debts.

Car loans, credit cards & personal loans all have very high rates of interest. By paying these off, you’ll save in interest costs. This is the first place for your money. 

? Consider your Super

Using this money to put into your Super can also be a good strategy to reduce tax on your investment earnings. But do remember that there are limits on contribution amounts & account balances. 

? Start an investment portfolio

Investing the money could be the smartest option if you’d like to see the money work for you as long as possible. You can invest a lump sum and enjoy spending the earnings of the portfolio (to enhance your lifestyle). I have clients who receive income from investments to a) pay for school fees b) allow them to work part-time c) allow them to enjoy extra holidays...anything you wish is possible! Or you may wish to watch it grow for a few years, while you’re deciding how to use it. Investing the money into a diversified portfolio is also a strong hedge against inflation, so the overall value keeps up with the cost of living. (If you just leave the money in cash, the value of it will erode over time due to inflation).

You may ask..well shouldn’t I put it all on my home loan?

This comes back to the question…what are your goals for the money. Security of having no home loan, or wealth creation (for financial freedom sooner). With home loan interest rates at all-time lows, investing in assets that have historically earned 8%pa + per year, can be more enticing to some people, than paying off a loan that is less than 3%pa. It comes down to your time frame, your overall goals, and your tolerance to market volatility.

When you receive sudden wealth, often the difficulty is just getting started to look into your options. Once you have a plan in place on how the money can best serve you and your family, you’ll feel more comfortable making some splurges, or even helping family or the needy (donations to registered charities are tax-deductible.

The notes here are general in nature, so always seek professional guidance to help you evaluate the most suitable plan for your own circumstances, so the money will help your life, not hurt it.

*General Advice Warning*

Any advice or information in this publication is of a general nature only & has not taken into account your personal objectives, financial situation and needs. Because of that, before acting on the advice, you should consider its appropriateness to you, having regard to your personal objectives, financial situation & needs. Past performance is not a guarantee of future performance.