Like many people, you may dream of a day in which you get a sudden infusion of wealth. Realistically, you know that you’re probably not going to win the lottery. But you could get an inheritance. And, depending on its size, it could give you an enormous boost toward achieving your long-term financial goals – if you use the money wisely.
One of the smartest moves you can make may be to do nothing – at least, for a while. Many financial experts agree that it’s a good idea to wait six months to a year before making any major financial or investment moves related to an inheritance. You won’t want to let emotions dictate these kinds of decisions, so take your time. Consider putting the funds in a money market account, a Certificate of Deposit or a short-term bond; you can get a decent return, and you’ll have access to the money when you’re ready to use it. Furthermore, you may need some of this money handy to pay any taxes that might accompany your inheritance.
Look for liquidity, growth and income
Once a reasonable time has passed, you’ll be ready to put your inheritance to work. No matter what your individual situation looks like, you can almost certainly benefit by adding elements of liquidity, income and growth to your financial holdings. How can you do this? Let’s look at some possibilities:
•Liquidity for emergency fund – If you haven’t already set up an emergency fund containing three to six months’ worth of living expenses, you might want to use part of your inheritance to do so. Once you’ve established this fund, you won’t have to dip into your investments to pay for unexpected costs, such as a major car repair or a new appliance. Keep your emergency fund in a vehicle that offers quick access and a decent return, such as a money market account.
•Growth for retirement accounts – 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 couldn’t afford to “max out” on your 401(k) plan at work because you needed to keep your take-home pay at a certain level, your inheritance might help. And it may also give you the ability to contribute the maximum to your Roth or Traditional IRA.
•Income from dividends – 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-percent previously they were taxed at your current income tax rate. (This 15-percent rate is effective through December 31, 2008.) 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 principal invested, and they may not always pay dividends.
By following these suggestions, you can get the most out of your inheritance. Of course, before you invest your inheritance, you’ll want to consider your risk tolerance, time horizon and investment goals. When you invest wisely, you’ll be showing respect to those who left the inheritance to you in the first place.
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