By Janet Gray, B.A., B.Admin, CFP®, CHS, EPC, CPCA
Waiting for an inheritance is not a solid financial plan. But the fact is, Stats Canada reports that the total net worth of Canadians over age 65 is $2.18-billion, and much of that legacy will be passed on. Those on the receiving end of a generous bequest have the opportunity to make a real impact on their financial well-being, but only if they make the right choices in the short and long term.
There are many ways to use a large inheritance, and we’ll look at several of them in this article, but whenever you receive any kind of financial windfall, the first thing you need to do is catch your breath.
Take a Deep Breath and Park Your Money
The gift of an inheritance is bound to the sadness of loss. Allow yourself time to grieve. Don’t make important decisions for at least three or four months. Park the assets in a high interest savings account until the emotional fog begins to lift. In fact, parking your money is good advice for any sudden financial windfall. The shock needs to normalize before you make decisions.
When you are ready to make some decisions, they should be made under the umbrella of a comprehensive financial plan.
Here are some of the options to consider.
Pay Down Debt
Freedom from debt has so many payoffs it’s always an excellent option. Not only are you free from the weight of what you owe, the amount saved in interest often makes debt repayment a better (and safer) return on investment than the investment market. Paying off a $10,000 credit balance that charges 18% interest can save you up to $1,800 a year, about triple what you could hope to earn on a $10,000 investment in stocks and bonds in one year. Start by paying your highest interest credit card debts and then move to car loans, bank loans and mortgages.
Freedom from debt goes beyond your financial well-being to your emotional well-being as well. Eliminating debt lifts an emotional weight off your mind. Debt stress affects self-esteem and creates tension in relationships. Using your inheritance to eliminate this burden is a smart choice.
Establish an Emergency Fund
Three to six months of living expenses is the typical recommendation for an emergency fund. There should be enough to keep you and your family afloat in the case of a job loss, illness or other unforeseen impact on your income. But how many people are able to actually put this amount aside? It can be challenging. A substantial inheritance can allow you to create, or top-up, this important financial buffer.
Fund Your Retirement
Take time to review your retirement plan. Is there a shortfall between your projected income vs. expenses? An inheritance is a good opportunity to fill in the gaps, especially if you have room in your RSP or TFSA. Or maybe this windfall is an opportunity to expand your lifestyle goals for retirement. Talking to an advisor about how to maximize this endowment is key.
Consider Your Own Legacy
If you have inherited a significant amount of money, it is wise to update your own estate plan to take it into account. Perhaps, instead of it becoming part of your general assets you would like to earmark it in a special way. You could set up a trust for your children, or bequeath the funds in a manner that honours your benefactor, such as a donation to a cause that was important to them.
Help Your Own Kids Out
If your own needs are adequately taken care of, perhaps you want to use your inheritance to help your own children now. If you have young or teenaged children, you may want to add money to their RESP accounts to ensure they have the education money they will need in a few years. The added bonus is that the Canada Education Savings Grant will match at least 20% of your contributions (up to $500) on an annual basis to a maximum lifetime grant of $7,200 per child.
Treat Yourself and Honour Your Benefactor
Impulsively spending an inheritance under the guise of “found money” may sound fun, but if you miss the opportunity to improve your financial well-being, you will probably have regrets. That said, using some of the money for a special purchase or experience has merit. For example, if the money is from a parent, perhaps mom or dad would have been happy for you and your children to visit the country of their birth.
Make the Most of This Opportunity
You have been given an incredible opportunity to improve your financial well-being. Make the most of it by considering all your options. But don’t make decisions while you are grieving.
You need a plan. Consider working with a fee-for-service financial advisor who doesn’t sell investments and specializes in advice that is free from any conflict of interest—an advisor that sells investments is likely to suggest investing your new wealth. A fee-for-service advisor will help you consider a broad range of options that support your personal goals.
Ultimately, the decisions you make can change your financial future and perhaps even the financial future of your children. An inheritance is a loving gift that needs to be handled with care.
We hope this article has been helpful and provided some practical advice on how you can improve your financial well-being. If you need additional support, please contact one of our Money Coaches today.