Planning for your financial future? Give your plans a boost with information tailored for you
Start Choosing Here »

3 Smart Ways to Spend Your Inheritance

×
The Deceased Laying In A Coffin At His Funeral With Bags Of Money Surrounding Him
Getty Images
Great news! According to a recent survey from Bankrate.com (RATE) subsidiary Interest.com, there's a good chance that you will soon inherit a share of a vast sum of money.

A recent poll taken by the financial gurus at Interest.com shows that barely a quarter of Americans expect to receive an inheritance in their lifetimes. And yet fully 64 percent of American retirees say that as a matter of fact, yes, they do have some money lying around -- $6 trillion in total, give or take. And they do plan to leave some of it to the younger generations in their wills.

And that's where the trouble begins.

Bad News! There's a Good Chance You'll Soon Inherit Some Money

For most of us, the prospect of getting a windfall inheritance from Grandma, Granddad, Mom, or Pop will be bittersweet at best. On one hand, there's the passing of a loved one. Of course, on the other hand, there's a pile of dough to cushion the blow.

On the third hand, though, that money may not last very long.

As Michael Finke, a personal finance professor at Texas Tech University in Lubbock, told Interest.com, people who receive a small inheritance tend to spend the money rather quickly: "When you receive an inheritance that's under $10,000, you tend to frame that as spending money."

Fellow Texas Tech professor Russell James notes that even when larger amounts are inherited, "at least half the people are just going to blow it. And by blow it, I mean 12 months later it's gone."

What do they spend the money on? Interest.com's survey finds many respondents surprisingly candid about how they'd spend a windfall. Nine percent would use the cash to buy a bigger house. Three percent would blow it on jewelry or a nice car. And 3 percent would take a vacation.

The Road That's Paved With Good Intentions

These aren't the best choices, of course. And most people say they plan to take better care of any money they should inherit.

Certified financial planner Erin Baehr of Baehr Family Financial in Pennsylvania points out to Interest.com that among her clients who expect to inherit money, the three uses for the inheritance most often mentioned are to "pay off their mortgage, pay for their retirement and pay for their kids to go to college."

Interest.com's survey found these same choices to be the most popular options nationally, with about 72 percent of respondents saying they'd either save an inheritance windfall, use it to pay down debt, or spend it on education.

The Big Three

Compared to blowing an inheritance on jewelry, McMansions, and Hawaiian vacations, there's no question: Saving, paying down debt, and getting an education are better ways to use an inheritance.
They also tend to echo the advice of many financial planners, whose road map to financial security generally runs in three major phases:

First, set aside a rainy-day fund. Six to 12 months' wages is the usual benchmark to ensure you're sufficiently "liquid" to withstand short-term financial turmoil, and won't be pressed to find cash to deal with any of life's little surprises.

Second, once that rainy-day fund is established, pay down high-interest debt (credit cards, car loans) first, then move on to lower-interest debts (student loans, home mortgages). Savings need to come before debt paydown because you don't want to get stuck in a situation where you've paid off your debts, then get surprised by a big bill when you have no cash to pay it, and wind up having to go right back into debt.

Third, once you're debt-free and have your rainy-day fund established, any "extra" cash left over can be invested for the future. Ordinarily, this advice refers to investing in stocks, bonds, and mutual funds. But given that unemployment rates for college graduates these days are just half the rate of unemployment for high school graduates, "investing" in your kids' education seems a perfectly valid corollary -- and one that could pay dividends in the form of bigger paychecks.

As a matter of fact, with the stock market as richly valued as it is these days, using an inheritance to help Junior achieve a college degree and the higher earnings potential that goes with it just might help secure your retirement as well.

Motley Fool contributor Rich Smith has no position in any stocks mentioned.


Increase your money and finance knowledge from home

What is Inflation?

Why do prices go up?

View Course »

Advice for Recent College Grads

Prepare yourself for the "real world".

View Course »

Add a Comment

*0 / 3000 Character Maximum

14 Comments

Filter by:
Edmond S. Abrain

The likely recipients of inheritance funds have been conditioned by our culture to increase their debt, spend more money, and expect that all their needs will be served by the government. My guess is they will spend the money on self indulgence as fast as they can.

October 03 2013 at 3:27 AM Report abuse rate up rate down Reply
Stephen

The smartest way to spend your inheritance, is FAST.

October 02 2013 at 11:25 PM Report abuse rate up rate down Reply
kolblh

Your first shock will be the inheritance tax. Government gets their's first.

October 02 2013 at 6:19 PM Report abuse rate up rate down Reply
1 reply to kolblh's comment
pdbocc

Under current law the federal inheritance tax exempts the first $5 million from taxation. Don't know about the state laws where you live. But if Grandma or Mom and Dad leave you $5 million they probably already consulted with a tax attorney to make sure you, not the government, gets to keep the lion's share of their estate.

October 02 2013 at 7:45 PM Report abuse +1 rate up rate down Reply
jarvis_williams4

Inheritance is a fantastic way to pass on and help family increase its standard of living by building wealth.

If one can pass on cash, great, but land, houses, jewelry, gold, silver, guns, etc. are the basics.

Barring calamity or end of life care, every person should see it their duty to pass on inheritance.

October 02 2013 at 5:05 PM Report abuse rate up rate down Reply
2 replies to jarvis_williams4's comment
pdbocc

It is NOT your parent's DUTY to pass on an inheritance to you or anyone! It is there money and/or property and if they chose to spend it all during thier lifetimes, that is their right. Sounds like you have an entitlement mentality thing going on.

October 02 2013 at 7:47 PM Report abuse -1 rate up rate down Reply
vlady1000

I agree, inheritance was a gift to you and you should pass that gift on..........unless you are a greedy as......

November 12 2013 at 7:56 PM Report abuse rate up rate down Reply
n2hifi

Lastly, and no one likes to consider this, but if you are married it is usually a good idea to keep inheritance spearate from "joint assets".

This is fair to both sides and as long as you do so, one spouse cannot claim that money in a divorce.

Harsh realities of life I guess

October 02 2013 at 1:44 PM Report abuse +1 rate up rate down Reply
catherinator

Do whatever you want with it. Who cares?

October 02 2013 at 1:26 PM Report abuse -2 rate up rate down Reply
mrscada

This is a nonsense article on common sense!

October 02 2013 at 1:17 PM Report abuse -1 rate up rate down Reply
1 reply to mrscada's comment
pdbocc

Except that many people lack any common sense when it comes to money.

October 02 2013 at 7:48 PM Report abuse rate up rate down Reply
debzal6

invest in companies that grow and pay larger divideds annually - it may not make you rich but you will get a raise every year.

October 02 2013 at 12:59 PM Report abuse +1 rate up rate down Reply
2 replies to debzal6's comment
vrosen

that is right. dividend reinvestment in blue chips is best.

October 02 2013 at 3:08 PM Report abuse rate up rate down Reply
vlady1000

until they hit hard times and cut (or eliminate) the dividend.......and the price of the stock is less than 1/2 of what you paid.

October 02 2013 at 5:03 PM Report abuse rate up rate down Reply
C

if you have $10000 in credit card debt and $10000 in cash saved...pay the card off...worry about the need for money later at least you won't be charged interest in between that time.

October 02 2013 at 12:53 PM Report abuse rate up rate down Reply
mily469

no inheritance ever for me and I could care less. I am happy making enough for food and shelter.

October 02 2013 at 11:51 AM Report abuse -3 rate up rate down Reply