How to Manage an Inheritance: The Best Way to Spend, Save, and Invest Your New Wealth

When you inherit a large sum of money, it can be difficult to know what to do with it. How should you save it? How should you invest it? How can you make sure that you don’t blow through your new wealth in a matter of months? In this blog post, we will highlight some best practices for how to handle an inheritance. We’ll discuss how to prudently spend and save your money. As well as how to wisely invest it so that you can make the most of your new wealth and ensure you honour the legacy of the person who has given you this money. 

Let’s talk about lifestyle creep

Lifestyle creep is the tendency to spend more money as your income or net wealth increases. While it’s natural to want to upgrade your lifestyle when your financial situation improves. It’s important to be mindful of lifestyle creep so that you don’t overspend and put yourself into debt.

If your goal is to preserve your wealth, you should be especially mindful of lifestyle creep when you receive a windfall, such as an inheritance. It can be tempting to spend your inheritance on lavish vacations, a new car, or designer clothes, but if you’re not careful, you could quickly find yourself with nothing left.

So what should I do with my inheritance?

Don’t rush yourself

Losing a loved one can be an extremely emotional time. It’s important to give yourself time to grieve and process your feelings before making any major decisions about your inheritance. Once you’ve had some time to heal, you can start thinking about how you want to use your inheritance.

A short term-deposit or simply a high interest savings account can be a good place to park your inheritance until you’re ready to look at your financial options. 

Seek professional advice

A financial advisor can create a personalised plan for how to best utilise your inheritance. They can help you figure out how much you should save, how much you can afford to spend, and what kind of investments would be best for you.

Working with a financial advisor is a good idea if you’re not sure what to do with your inheritance or if you want to make sure that you’re making the best decisions for your financial future.

This can be extremely helpful when you have also inherited a property and other assets.

Pay off any outstanding debts

If you have any high interest debts (usually anything other than your mortgage)  it’s a good idea to use your inheritance to pay them off. This will reduce the amount of interest you’re paying and free up more cash flow each month.

You may also want to consider using your inheritance to pay down your mortgage, if you have one. In the current increasing interest rate environment we find ourselves in this strategy could be a good one to accelerate your loan repayment plan and reduce some short term financial pressure. 

Don’t spend it all at once!

Implementing a budget can be a fantastic way to make sure that you’re not overspending and blowing through your inheritance.

Perhaps you will want to use a small percentage of your inheritance towards a family holiday or an item you’ve been wanting for a long time. That’s perfectly fine! However, it’s important that you’re mindful of your spending and that you don’t go overboard.

One way to do this is to set up a separate bank account for your inheritance and only use it for specific purposes. This will help you keep track of your spending and make sure that you’re not using your inheritance money carelessly.

Consider Giving

If you are in a comfortable financial position, you may want to consider giving some of your inheritance to family members or a charity. Giving back can be a great way to make a difference in the world and leave a lasting legacy for your loved ones or a cause you are passionate about. 

Investing your inheritance

Investing your inheritance is a great way to grow your wealth over time.

There are many different ways to invest your money, so it’s important to do some research and figure out what would work best for you. You may want to consider investing in stocks, managed funds, real estate, or even starting your own business. Investing your inheritance can be a great way to secure your financial future and build long-term wealth.

If you have inherited a property, you can consider whether you want to keep it as an investment property or sell it and invest the proceeds elsewhere.

Investing a large sum of money can be daunting, however there are many professional investors and financial advisors who can help you make the best decisions for your situation.

Below we break down popular and proven ways that people invest their inheritance.

Investing in Property

Many deceased estates involve a property. There can be value in keeping this property  as an investment, as it will likely appreciate in value over time.

Capital Gains Tax on inherited property is a little complicated. So before making a decision about what to do with an inherited property it is a good idea to speak with your Accountant about what tax implications there may be in holding or selling the property. 

It is common for the heirs of a property to consider the sale  of the property and use these proceeds to invest in other opportunities, such as other an investment property, shares, superannuation or even a new business venture.

Investing in the Share Market

The share market offers a range of opportunities for investors, including dividend paying stocks, growth stocks, index funds and even international shares.

Investing in shares can be a great way to grow your wealth over time, however it is important to remember that the share market can be volatile and you may not always make money on your investments in the short term.

The benefits of investing in the share market is that this investment has the potential to provide high capital growth over the long term, and your investments can also offer a regular income stream in the form of dividends. You also don’t have to deal with things like tenants or repairs, as you would if you were investing in property.

It’s important to do your research before investing in shares and to seek professional financial advice if you’re unsure about anything.

Bonds

Bonds have a small part to play in any investment portfolio as they tend to be less volatile than shares and can offer diversification benefits.

Bonds are essentially loans that you make to a government or corporation. In exchange for loaning your money, the borrower agrees to pay you interest at a fixed rate over a set period of time.

Due to a highly volatile interest rate environment, the role of bonds as a defensive investment has been turned on its head in 2022. 

High Interest Savings Accounts & Term Deposits

A savings account or term deposit is usually seen as the safest place to invest your money.

The interest rates on savings accounts and term deposits are usually much lower than other investments, however there is very little risk involved. The interest rates offered are usually lower than the rate of inflation, which means your money will lose value over time if it’s just sitting in a savings account.

A term deposit is a type of savings account where you agree to leave your money in the account for a set period of time, usually between one and five years. In exchange for this, the bank agrees to pay you a  higher interest rate than a standard savings account.

While savings accounts and term deposits are not the most exciting places to invest your money, they can be a good option if you’re looking for a safe place to park your cash in the short term.

Pay off your mortgage

While this isn’t technically an investment, paying off your mortgage can have an incredibly freeing feeling.

If you have a lot of money sitting in savings, you may want to consider using some of it to pay off your mortgage. This will reduce the amount of interest you’re paying on your loan and could save you a lot of money in the long run.

Of course, everyone’s financial situation is different and there are a lot of factors to consider before making a decision like this. You should always speak to a financial advisor to get professional advice before using your savings to pay off debt.

Invest in yourself

Starting a business, or upskilling with a new degree or qualification, can be a great way to invest in yourself.

Not only will you be investing in your future earnings potential, but you’ll also be learning new skills and gaining valuable experience.

Investing in yourself is one of the best things you can do with your money, and it’s something that can have a big return on investment (ROI) in the  long run.

Is there an inheritance tax in Australia?

There is currently no inheritance/estate taxes in Australia, However according to the ATO’s website:

  • capital gains tax may apply if you dispose of an asset inherited from a deceased estate
  • income tax applies as usual to any dividends or rental income from shares or property you inherit.

You can read more information about Capital Gains on inherited property here.

————

Of course a professional financial advisor should always be consulted to get the best ROI and plan for your individual circumstances, but these are some general ideas of how to best handle an inheritance. How you spend, save, or invest your new wealth is up to you–but now you have a starting point.

Making smart decisions about your inheritance can help secure your financial future and the financial future of your family.. Be sure to take your time, do your research, and seek professional advice if needed. With careful planning, you can make the most of your inheritance and use it to achieve your financial goals.

Get in touch with Catalyst Wealth Group Today. To see how we can assist you.