Have you ever dreamt of winning the lottery, or inheriting a large sum of money from an estranged aunt or uncle? Well, your wildest dreams could come true, but not in the way you might think. Over the next decade, millennials are set to inherit a whopping $68 trillion from their Baby Boomer relatives.
This estimate is giving hope to many young millennials who are currently strapped for cash. If the prediction holds true, they’ll be five times richer in 2030 than they are today. Millennials will also become the richest generation in history when their parents transfer over this wealth.
But what will millennials do with all of that money? If we look at the extremes, some may spend it all, while others will put every penny into a savings account, but neither of those options are advisable when managing a major windfall. It’s time we got serious about how to spend — and save — that money wisely. Here’s what you need to know to make the most of the money entrusted to you. You got this!
Stay Calm and Get Help
What’s the first thing you should do when you receive your inheritance? Put it into a savings account. That’s right. Stowing your dough in a safe place until you figure out what to do with it is a crucial first step in managing your newfound wealth. Once the cash is securely tucked away, get in touch with a financial advisor ASAP for advice and insight about what to do next.
Most people underestimate how much money they need to live comfortably for the rest of their lives. (You’re probably going to live longer than you think, thanks to modern medicine!) Before you announce your good fortune and abruptly quit your day job, take a long look at what your inherited money really means for your budget. Maybe it means you can retire a few years early, or upgrade to a larger home. First step is that you continue to budget your earnings, and keep track of your spending. Keeping a close eye on your financial habits will help you adjust your standard of living as needed so you can enjoy a comfortable life without ever worrying about running out of cash.
Pay Your Taxes
Before you tell all your friends how much money you’re inheriting, remember to take taxes into account. As of 2021, you’ll only pay federal estate taxes if you inherit an estate worth more than $11.7 million. This means the vast majority of us have nothing to worry about. But keep in mind that six states have an inheritance tax, and each has its own laws on who is exempt, who has to pay, and how much they owe. Keep in mind that state rules also include thresholds of value. For example, if you inherit $150,000 and the state only imposes the tax on inheritances over $100,000, you’ll only have to pay taxes on $50,000.
Moreover, most states require you to pay these taxes within a few months of your parents’ passing. In Iowa, for instance, you must file the inheritance tax return and pay the amount due on or before the last day of the ninth month after their death. Keep all this in mind as you move through the process, and make sure your financial planner is keeping you apprised of all the ins and outs.
Make Intentional Purchases
Have you ever owned a home? Have you been wanting a new car, or a master’s degree that will help boost your earning power? With an inheritance, you might be able to have all of those things, but must be intentional about which endeavors are worth such a large portion of your inheritance. Otherwise, a few big purchases — and unexpected accompanying expenses — could drain your account.
Consider which major purchase would yield the greatest return. Owning a home could help you earn equity and serve as a valuable asset to pass on to your children someday. On the other hand, a degree could land you a high-paying job or a dream career. Weigh the pros and cons and carefully consider your options before making a final decision.
Of course, one of the best ways to grow your money and multiply that inheritance is to reinvest it. If you’ve never dipped a toe into the waters of investing, we’ve got a rundown here. Your options are limitless, but if you want to play it safe, you might consider investing in an index mutual fund or, if you’re willing to take on a bit more risk, purchase bonds.
Avoid putting all your eggs in one basket to mitigate risk — this means you should diversify your investments into different asset classes, and different types of stocks. Once you’re comfortable with how the stock market functions, you can expand your portfolio to include real estate, crypto, and other assets that interest you. Also, adding a large chunk of the money you inherit to a retirement account — one that you simply cannot touch until you’re 65 or older — is also an excellent idea. You can use a traditional plan like an IRA to begin building your nest egg, or invest in a cash-value life insurance plan if you want features like tax deferment and borrowing.
If gaining an inheritance also meant losing a loved one, then you need to do something nice for yourself. Set aside a reasonable amount, and go on the vacation you’ve deserved to take for years. Buy a few toys that’ll bring you joy. Invest in your passions or hobbies, or a special piece of jewelry that will inspire you to think about your loved one every time you wear it.
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