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I am about to inherit $100,000. I am the first person in my family to ever receive an inheritance. What is a good low-risk investment that will protect the principle?
This is a timely question, as many millennials stand to receive inheritances from prosperous baby boomers. Without knowing more about your specific financial situation, I can’t recommend any one course of action for you. But what I can do is give you some things to think about as you make a plan for that windfall.
Before you do anything, park the money in a high-yield savings account for a few months. You can compare interest rates on Bankrate (I’m a fan of Ally Bank’s high rates and easy-to-use website). Your money can earn a bit of interest while you take some time to consider the emotional and financial ramifications of receiving such a large gift.
Next, think about your financial situation:
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Do you have any high interest rate debt?
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Do you have at least 3 months of net pay allocated for emergency savings?
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Are you maxing out your retirement accounts?
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Do you have any major purchases coming up?
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Do you want to save for your child’s college education?
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Do you want to use some of this money to help other relatives out?
Make a list of these financial goals and consider hiring a financial planner to help navigate through your financial priorities.
I recommend making small shifts over time with this money, rather than doing one big thing. For example, many people use a cash windfall to buy a house immediately, but they might have credit card debt that’s bringing their credit score down. A good move in that case may be to use some of the windfall to pay down the debt first. This way, your credit score will increase, improving your odds of a lower interest rate on a mortgage in the future (which will save you thousands of dollars in interest payments over the life of your loan!).
How much time do you have? Any money you’d need in less than five years should go in a high-yield savings account or CDs. If you don’t need some of your money for five years or more, you can invest it through a discount brokerage like Vanguard, Betterment, or Ellevest. Or you could set up monthly contributions so that you dollar cost average your money into an investment account.
What does your tax situation look like this year and in future years? Tax planning is important when you come into a large sum of money. There may be steps you can take to help lower your taxable income for this year and for years to come.
Do you want to gift money to any charities? If you have more money that you need, you may decide you want to gift money to charity, which can be done in a tax-efficient way. Consider donating appreciated stock or setting up a Donor Advised Fund (DAF). It’s extremely important to discuss your tax planning strategy with an accountant and a financial planner because they may be able to spot certain ways to take maximize your current financial situation so you can reach your goals even faster.
Finally, have you created your own estate planning documents? Consider reaching out to an attorney in your network to make sure that your wishes are carried out should anything happen to you so that your loved ones are also protected.
