A recent study was posted in the Sydney Morning Herald that showed one in five who received an inheritance of $100,000 would end up spending it all. Out of those who saved the money, only half of the participants actually put the money towards a long term goal.
The majority of people instead whittled the money away on things like new cars, household goods and holidays. A shame really, as the legacy of the inheritance will have little to show for it beyond a few years of extravagance.
Now as we move into a time where generations, particularly baby boomers, start to receive their inheritances – we need to be smarter than ever with how we invest, save and use the inheritance money that is received.
Here are some ideas on how to use your inheritance money for longer term good, a great way of honouring those who gave it to you.
Pause for a second and evaluate your inheritance money
One of the biggest mistakes people make when they receive an inheritance is to go crazy on a spending splurge. This is a sure fire way to make the money disappear out of the door. It is a good idea at this point to seek financial advice about what tax implications may come from different strategies such as Capital Gains Tax.
Timing can be a critical factor in how much money you will actually get. It will also have an impact on your assets and income which could affect any Centrelink entitlements you may be getting or potentially getting.
Putting your inheritance into superannuation
Superannuation is one of those things most Australian’s vastly neglect. The reality is that the Government pension is not going to be adequate enough for future generations of Australian’s. Resources are tigheting as the population ages, which means superannuation is more important than ever for working Australian’s who have the ability to maximise their super.
Putting some of the inheritance into your superannuation can give you piece of mind for later on. There are two types of contributions.
Concessional contributions are limited to $25,000 (that is contributions made from your pre-tax salary). Ideal if you wanted to live off the inheritance money, while sacrificing the majority of your salary into superannuation.
Non-concessional contributions have a $150,000 cap and it is paid from your post tax salary, aka what money you get paid after tax each week/fortnight/month. It might be wise to consider whether there is benefit in making a deposit of your inheritance into super this way.
Best to speak with a financial planner though to decide the most efficient way to deposit your inheritance into the superannuation system while minimising tax.
Use your inheritance to pay off your debt
If you haven’t already done so, you should be tallying up all your debt and looking to see which debts are costing you the most money.
Paying down part or your entire mortgage could be a good option as it will save you interest repayments, no point earning minor amounts of interest while you get charged larger amounts of interest with your debts.
Also look at credit card debt and other loans. Think about how much relief it would make to get rid of these liabilities. Most people would find it more rewarding to be able to use their parent’s hard work to become debt free rather than blow the money on a fancy holiday. I would think most parents would also be happier knowing they were able to help you become more financially stable.
Hot tip: if you do use your inheritance to pay off your debt, make sure you close the line of credit and promise yourself never to get back into debt. Use it as a get out of jail free card.
Invest your inheritance money
Superannuation is a good investment strategy for the money but there are also other options such as shares and term deposits. The trick to investing is to diversify your money sufficiently to ensure you aren’t exposed to any one investment asset that could see your money disappear if it fell.
Term deposits will be a low risk investment but the returns may not be as great as shares or a managed fund.
Shares can be great if you are willing to look at a longer term strategy. The key is to buy them low and not pull out immediately if they go down. For those who are more risk adverse, look at high interest online accounts.
Hot tip: remember that any interest you earn in these accounts is taxed at your marginal tax rate. So if your tax rate is 30% and you earn $100 interest, you will effectively only earn $70 after you pay tax (less 30% , which is $30 tax).
Create a combination strategy for your inheritance money
For some people using a combination of strategies may be the way to go.
You may put some towards paying off debt, some into your super and some into some other type of investments.
That doesn’t mean you cannot enjoy some of the money for yourself. Use 5-10% of the money inherited to do something you always wanted to do. Just make sure whatever you do is worth it and something that will add value to your life.This is far smarter than blowing the whole amount on discretionary spending like the one in five people above.
It may be a holiday, it may be a new car or it may just be something you always wanted to purchase but did not want to spend the money on. Whatever strategy you use, make sure you have a plan in place beforehand. Also do make sure you get advice either from an accountant, financial planner or lawyer about the legal and financial implications of an inheritance.
This will enable you to have a much more thorough plan in place about what you will receive and how you can use the funds to better your finances.
So to summarise, once you get an inheritance: stop, think, invest, diversify and get ahead with it.
Or you could just buy a car that will lose 30% of its value when you drive out of the showroom (joking! Bad idea)