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What Should You Do with an Inheritance?

Sooner or later, we all experience the loss of a loved one. And, while many people think it would be simply fabulous to inherit a million dollars from some long-lost aunt who they didn't know or love, the truth is, receiving an inheritance is normally a very bittersweet experience.

Sure, who couldn't use $25,000, or $100,000, or half a million, or five million dollars? When it comes at the cost of losing a parent, or a spouse, or a best friend, however, the money is not—at least for a while—a happy addition to your life.

Most people desire to leave something behind for their children and/or grandchildren. Perhaps it's a natural tendency to want to continue to provide for those you love—even after death. That's why clients spend hours with lawyers and financial planners, working to keep as much of their estates as possible in the hands of their families, and out of the hands of the government.

Go Figure

Fully 20 percent of people 50 years or older who were surveyed said that an inheritance—or a lack of one—had caused hard feelings among members of their families.

If you receive an inheritance, you'll need to realize that it's very different from a bonus, for instance. An inheritance is a gift. It's not earned, in any way. This gift, hopefully, can provide some substantial security in your life.

We strongly recommend that you invest the entire inheritance, then use the income that the funds generate for the extras in life. Financial advisors call this the “not using principal” strategy. You invest the principal, and use the income you get from it for trips, toward a car, a bigger home, or whatever.

If you inherit $100,000, and invest it so you're getting a five percent return, you'll have $5,000 more per year than you did before you got the inheritance. If you receive more, your additional income will be more.

If you spend the money you get as inheritance, it's gone. Many people have inherited $100,000 or $200,000 and, thinking they were wealthy because it was more money than they ever had before, went on wild shopping sprees that quickly left them broke.

If you get a large sum of money, be sure to contact a financial advisor. You should never attempt to invest large sums on your own if you're inexperienced.

More on: Family Finances


Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.

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