What Should I Do With a $50k Inheritance?

Mark Henricks   Wed, December 30, 2020

It’s not uncommon for people to receive sizable inheritances, but it’s less common for them to make the most financially advantageous decisions about what to do with their newly acquired assets. If you inherit a significant amount, such as $50,000, a strategy for wisely handling a windfall is likely to include making a long-term plan that considers your age and goals, starts with a well-stocked emergency fund and employs tax-advantaged investments if available. Consulting with a financial advisor is a great way to develop a realistic long-term plan and lay out some strategies for reaching your goals.

Over an eight-year period, one in five American households, including older workers, got an inheritance averaging $67,000, according to a 2006 research report. But most spend the money in a few years and have little left to show. A decade after getting an inheritance, the typical heir still has just a third of the windfall, according to a Swedish study from 2016. Here’s how to make an inheritance last.

Inheritance Strategies

The first thing to do after receiving a sizable inheritance is to place the funds in a secure account, such as a bank savings account or money market fund, while you take stock.

Whether you do it on your own or with professional assistance, create a sensible plan for handling the inheritance. Start with your current circumstances. Consider your age, income, assets and debt. Factors like your personal risk profile, future obligations such as children’s college and personal goals such as business ownership come into play.

Note that inheritances are not considered income by the IRS, so you won’t have to pay taxes on the money you inherit. However, any interest or capital gains on investments you make with the funds could be subject to taxes.

Before making any long-term investments, creating a rainy-day fund is likely to be a priority. Loading a secure, easily accessed account with three to six months of basic expenses can provide peace of mind while avoiding the need to borrow or tap illiquid funds in the event of an emergency.

Reducing high-rate debt could be next. Paying off revolving credit card balances will save more on interest than most investments can ever return. Getting into the habit of settling credit card accounts in full every month will prevent taking on more high-cost debt in the future.

Specific Options

After these priorities, much of the inheritance will be invested to build wealth long term.

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