According to a recent survey, Baby Boomers plan to leave their Millennial children an average inheritance of $940,000.
Inheriting a significant sum of money can be a life-changing event, especially for those in their 30s and 40s who are still building their financial foundations. That’s why it’s so important to approach this potential windfall with careful consideration and a well-thought-out plan.
Here are some tips on how to handle an inheritance wisely:
- Pay off your high-interest debt: Before considering any other financial moves, focus on paying off high-interest debts, like credit card balances or personal loans. These debts typically carry high interest rates that can erode your wealth over time. Eliminating them will free up more of your inheritance for other financial goals.
- Address your mortgage: While paying off your entire mortgage may seem tempting and a way to give you peace of mind, it’s not always the best choice. Compare the interest rate on your mortgage with the potential return on investments. If your investments can yield a higher return than your mortgage interest rate, it might be more beneficial to invest the money rather than paying off the mortgage entirely. Striking a balance between reducing mortgage debt and investing for the future is key.
- Invest wisely: Develop a diversified investment strategy that aligns with your financial goals and risk tolerance. Consider filling up unused contribution room in tax-advantaged accounts like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). RRSPs are great for long-term retirement savings, while TFSAs offer tax-free growth and flexibility.
- Think about an emergency fund and short-term savings: It’s a good idea to make sure you have a healthy emergency fund in place to cover unexpected expenses or financial emergencies. This fund should be easily accessible, typically in a high-interest savings account. You’ll also likely want to set aside some money for short-term goals or major purchases, like a new car or home renovations.
- Seek professional guidance: Managing a substantial inheritance can be overwhelming. An advisor can help you create a comprehensive financial plan that’s tailored to your unique situation and goals. They can also offer valuable insights, help you navigate investment options and ensure that you make the most of your inheritance.
While it’s essential to make responsible financial decisions with your inheritance, it’s also crucial to strike a balance between saving for the future and enjoying your life today. Avoid the temptation to spend your inheritance impulsively — large windfalls can disappear faster than you realize if they’re not managed wisely. Instead, take the time to evaluate your financial goals and create a plan that sets you on a path toward long-term financial security.
If you have any questions or you’d like some guidance about an inheritance you’ve received or about to, reach out to us anytime. We’re happy to help.