Receiving an inheritance can be a life-changing event, offering opportunities to improve your financial situation and achieve long-term goals. However, it can also feel overwhelming, especially if you’re unsure how to manage the money wisely. Whether it’s a modest sum or a significant windfall, taking a thoughtful and strategic approach is key to making the most of your inheritance.
This guide outlines the steps to take when you inherit money, helping you navigate the financial and emotional aspects of this unique situation.
Step 1: Pause and Reflect
Inheriting money often comes with emotional weight, as it’s typically tied to the loss of a loved one. Before making any major financial decisions, take the time to process your emotions and reflect on your priorities. Acting impulsively can lead to decisions you may later regret.
Step 2: Understand the Inheritance
Before you can decide what to do with the money, it’s important to understand the specifics of your inheritance. This includes:
- The Type of Inheritance
- Cash: Money deposited directly into your account.
- Investments: Shares, managed funds, or other financial assets.
- Property: Real estate, such as a family home or investment property.
- Superannuation or Life Insurance: Payouts from a deceased estate.
- Tax Implications: In Australia, inheritances are generally not subject to inheritance tax. However, certain assets may have tax implications:
- Capital Gains Tax (CGT): If you inherit property or shares and later sell them, CGT may apply.
- Superannuation Death Benefits: If you inherit superannuation from someone who was not a dependent, the payout may be taxed.
Step 3: Pay Off High-Interest Debt
If you have high-interest debt, such as credit card balances or personal loans, using part of your inheritance to pay it off can provide immediate financial relief. Reducing debt not only saves you money on interest but also improves your cash flow.
Step 4: Build an Emergency Fund
An emergency fund is a financial safety net that covers 3–6 months’ worth of living expenses. If you don’t already have one, consider using your inheritance to establish or top up your emergency fund. This ensures you’re prepared for unexpected expenses, such as medical bills or car repairs.
Step 5: Invest for the Future
Investing your inheritance can help grow your wealth over time and provide financial security for the future. Consider the following options:
- Superannuation Contributions: Making additional contributions to your superannuation is a tax-effective way to invest your inheritance. In Australia, you can make concessional (pre-tax) or non-concessional (after-tax) contributions, subject to annual caps.
- Shares and ETFs: Investing in shares or exchange-traded funds (ETFs) provides exposure to the stock market, offering the potential for long-term growth.
- Property Investment: If your inheritance is substantial, you may consider purchasing an investment property. This can provide rental income and potential capital growth over time.
Step 6: Save for Specific Goals
Your inheritance can help you achieve personal or financial goals, such as:
- Buying a Home: Use the funds as a deposit or to pay down your mortgage.
- Education: Invest in your own or your children’s education.
- Travel: Plan a dream holiday or experience you’ve always wanted.
Step 7: Protect Your Wealth
Once you’ve decided how to use your inheritance, take steps to protect it. This includes:
- Insurance: Ensure you have adequate life, income protection, and health insurance.
- Estate Planning: Update your will to reflect your new financial situation and ensure your assets are distributed according to your wishes.
- Financial Advice: Work with a financial adviser to create a long-term plan that aligns with your goals.
Common Mistakes to Avoid
While an inheritance can provide financial freedom, it’s important to avoid common pitfalls:
- Impulse Spending: Resist the temptation to splurge on luxury items or lifestyle upgrades.
- Neglecting Tax Implications: Failing to understand the tax consequences of your inheritance can lead to unexpected liabilities.
- Ignoring Professional Advice: Managing a large sum of money can be complex. Seeking expert guidance ensures you make informed decisions.
The Australian Context
In Australia, inheritances are becoming more common as baby boomers pass on their wealth to younger generations. However, the rising cost of living, housing affordability, and economic uncertainty make it more important than ever to manage inherited money wisely.
Key Considerations for Australians:
- Superannuation: Consider using your inheritance to boost your super, taking advantage of Australia’s tax-effective retirement system.
- Property Market: If you’re considering property investment, research the market carefully to ensure you’re making a sound decision.
- Tax-Free Status: While inheritances are generally tax-free, certain assets, such as investment properties, may have tax implications.
Final Thoughts
Inheriting money is a unique opportunity to improve your financial situation and achieve your goals. By taking a thoughtful and strategic approach, you can make the most of your inheritance while honouring the legacy of your loved one.
Remember, there’s no one-size-fits-all approach to managing an inheritance. Your decisions should reflect your personal circumstances, goals, and values. Take the time to evaluate your options, seek professional advice, and create a plan that sets you up for long-term success.
If you’ve recently inherited money and would like personalised advice on how to manage it, click here to schedule a complimentary consultation with an EPG Wealth adviser.