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Receiving an Inheritance? Make Sure Your Money Works as Hard as You Do.

Are you about to receive an inheritance from a family member, perhaps a parent or grandparent? Inheriting wealth has become increasingly common as older generations are expected to hand down approximately $70 trillion between 2018 and 2042.1

As a part of this great transfer of wealth, you may be wondering what to do with this unexpected gift of cash or securities. Pay off debt? Save for retirement? Take a vacation? Go back to school? It can feel overwhelming.

It helps to have a plan. After all, according to the National Endowment for Financial Education, an estimated 70% of people who suddenly receive a large amount of money spend it all in just a few years.2

Below are a few tips to get the most out of your brand-new wealth:

Build an Emergency Fund

If you don’t have a fund for emergencies such as an unexpected auto expense or accident, you may want to use a portion of this inheritance to establish or increase your emergency fund. According to a 2020 survey, only 39% of Americans can afford a $1,000 unexpected expense.3 Your emergency fund should ideally cover six months or more of expenses.

Keep in mind that this fund doesn’t always have to be in a checking or savings account. Consider an investment account where the assets can be invested in various types of stock and/or bond investing such as mutual funds and exchange-traded funds (ETFs) that can be sold within a few days if you need the money for an emergency.

Pay Down Debt

You could use the funds to pay off debt. For example, consumer debt, particularly credit card debt, comes with high interest rates that can negatively impact your credit score. Paying off debt with the highest interest rates first may save you money in the long run. According to CNBC, the average U.S. household has about $7,000 in revolving credit card balances4 and the average credit card interest rate, according to Creditcards.com, is over 16% (over 25% if you have bad credit).5 That’s over $1,000 in interest each year, assuming the balance remains constant.

Boost Your Retirement Savings

If you aren’t already contributing to your retirement accounts, consider using this newfound wealth for your retirement. This is especially important for younger people who can take maximum advantage of the power of compounding. Waiting just 10 years to begin investing can cause you to miss out on some significant savings opportunities. For example, if you invested $5,000 every year starting at age 25 up until you retire at 65 (a total contribution of $200,000 over 40 years), thanks to compounding, history shows you could end up with almost $1.1 million in savings at an average annual rate of return of 7%. Yet, if you instead start investing at age 35 up until retirement at 65 (contributing a total of $150,000 over 30 years), because you missed that first decade, the math shows you’ll historically end up with only about $500k—all because your investment had less time to grow.6 Even increasing your savings rate by a modest 1% can make a big difference over time.

Open a Taxable Investment Account

With your inheritance, you may want to open a taxable investment account as another way to gain access to stocks, bonds, mutual funds or ETFs and potentially build wealth over time. While the account offers no tax advantages, it offers more financial flexibility. There are no income or contribution limits, and you can withdraw your money at any time without incurring a penalty. As long as you hold investments for more than a year, you’ll pay the long-term capital gains rate which currently ranges from 0% to 20%, depending on your tax bracket. There are no required minimum distributions such as those that come with a Traditional IRA. This account can be used as a great long-term savings tool to help you reach your personal goals and achieve financial security.

Invest in Yourself and/or Your Family

Once you’ve set up your emergency fund, paid down your debt, and invested in retirement and taxable investment accounts, now it’s time to enjoy some of your new wealth. Do you have a specific goal in mind? Maybe you want to put a down payment on a new home, take a dream vacation, go back to college and earn an advanced degree. Maybe you want to save for a child’s or grandchild’s education. Make sure to prioritize your goals so you can work towards achieving them one at a time.

Every financial situation is unique and brings with it different challenges. At Jemma Financial, we can provide a custom roadmap to help you get the most out of your inheritance. Let’s start a conversation today.

1 “Older Americans Stockpiled a Record $35 Trillion. The Time Has Come to Give It Away.” The Wall Street Journal, 7/2/21. 2 “Smart Ways to Handle an Inheritance,” Kiplinger, 6/30/21. 3 “Just 39% of Americans could pay for a $1,000 emergency expense,” CNBC.com, 1/11/21. 4 “2020 American Household Credit Card Debt Study,” nerdwallet.com 1/12/21. 5 “Average credit card interest rates,” creditcards.com, 4/28/21. 6 This is a hypothetical example that assumes a 7% annual return and not intended to reflect the actual performance of any specific investment. Earnings are pretax, and may be subject to income tax when distributed. Source: NerdWallet

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