Ways to Not Let Your Inheritance Become a Money Pit! - Kingwood

Published: 11/04/2010 1:00pm

Diana VanHorn, CFP, Edward Jones

Like many people, you may dream of a day in which you get a sudden infusion of wealth. Realistically, you know that youíll probably never win the lottery, but you could receive an inheritance. And, depending on its size, it could give you an enormous boost toward achieving your long-term financial goals (like becoming rich!)Ö but only if you use the money wisely.

One of the smartest moves you can make may be to do nothingÖ at least, for a while. Many financial experts agree that itís a good idea to wait six months to a year before making any major financial or investment moves related to an inheritance. You wonít want to let emotions dictate these kinds of decisions, so take your time. Consider putting the funds in a money market account, certificate of deposit or short-term bond. That way youíll get a decent return, and youíll have access to the money when youíre ready to use it. Plus, you may need some of the money to be readily available to pay any taxes that might accompany your inheritance.

What are some other ways to make your inheritance grow? Well, once a reasonable amount of time has passed, you should then put your inheritance to work. Now matter what your individual situation looks like, you can almost certainly benefit by adding elements of liquidity, growth and income to your financial holdings. How should you do this? Letís look at some of the possibilities.

If you havenít already set up an emergency fund with 6 to 12 monthsí worth of living expenses, you should do so now. Once youíve established this fund, you wonít have to dip into your investments to pay for unexpected costs, such as a major car repair or any new appliances. Keep your emergency fund where you will have quick access along with a reasonable return, such as a money market account.

Also, if you invest part of your inheritance in a high quality, diversified array of investments, you can greatly accelerate the progress you make toward a comfortable retirement. For example, if you couldnít afford to ďmax outĒ on your 401(k) plan before, your inheritance might be able to help now. And it may give you the ability to contribute the maximum to your Roth or traditional IRA, too.

Lastly, to increase your current income, consider using some of your inheritance to invest in stocks that pay dividends. Due to recent changes in tax laws, dividends are now taxed at a maximum rate of 15%; previously, they were taxed at your current income tax rate. So look for stocks that have regularly increased their dividends, year after year. Keep in mind, however, that stocks are subject to market risk, including the potential loss of the principal invested, and they might not always pay dividends. So do your homework.

And, by following these suggestions, you will get the most out of your inheritance. Of course, before you invest, youíll want to consider your risk tolerance, time horizon and investment goals. When you invest wisely, you not only keep your inheritance from becoming a money pit, but youíll show respect to those who left you the inheritance in the first place.

For any additional investment information, contact Diana VanHorn, CFP, Edward Jones at 281-788-3351 or by email to Diana.vanhorn@edwardjones.com.

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