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Your Financial Planning Inheritance Checklist – what to do with an unexpected windfall

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May 6, 2021

Natallia Smith
(TruWealth Advice)

First up – don’t spend it all at once! Many people who receive an inheritance act without careful consideration and find themselves quickly running out of money. As always, when it comes to financial planning, preparation is the key to long term success!

It’s so easy to get excited when you receive an inheritance. Suddenly you can envisage reducing significant debts, paying off your mortgage, booking an overseas trip, or doing many of the things you dream of but can’t afford. Emotions run high, particularly if you’re also grieving the loss of someone important in your life.

 

Take a moment to stop, breathe, and seek professional financial advice

An adviser will help you work through your financial situation and determine the priorities for your inheritance funds. You both need to fully understand the entire picture from daily cash flow to savings goals, your deductible[1] and non-deductible[2] debt, and your long and short-term goals. Every person is in a different situation, and the best way to use your inheritance will depend on your personal circumstances.

 

Inheritance Checklist – 6 ways you can use your inheritance

  • Short-term needs: Will this influx of cash help you buy something you need or want, like a new car or a holiday? You may simply want to stash some money in your savings, so you have a sense of security and cash at hand for unexpected expenses. It is OK to treat yourself and address your short-term needs, but there are other ways an inheritance can benefit you and add to your future security, so make sure you look at all your options.

  • Mortgage: Your mortgage is a non-deductible debt and, as such, most people feel a strong temptation to pay off a large amount of this significant debt. While this is a viable possibility, don’t jump in and throw all the inheritance at your mortgage without considering the big picture.

  • Superannuation: Traditionally, many women have a low amount of super; the average amount for women heading towards retirement is about $200K. It is an option to contribute to your super to boost your retirement fund, but there are many rules and regulations to be aware of. It’s a viable option, but it is best to set up an overall plan to receive the best benefit from your money.

  • Investment: This is an excellent idea for many people as the returns on share or property investment can be quite effective. But, remember that this is a long-term strategy and must be understood and included as part of a plan to be effective in building a secure and viable financial future. Incurring Capital Gains Tax is also something to be aware of if you invest, then find you need to access the funds in the short term.

  • Invest for children: For parents, an inheritance can take away the stress of providing for their children’s future and education. There are many ways to do this, and it’s good to explore all your options. Your financial adviser has the knowledge and experience to help you set up the best plan to suit your family’s needs.

  • Pay off debt: It’s a great idea to pay off personal loans, car loans, credit cards and other non-deductible debt with high interest rates. Clearing debt helps to reduce mental and financial stress and improve your weekly cash flow which, in turn, will only benefit your future.

 

Generally speaking, when a significant inheritance is received, most people’s priorities are to:

  1. Pay off non-deductible debt

  2. Invest in shares, property or their children’s futures

  3. Contribute to their superannuation

This is certainly a viable plan, but it is imperative to do your homework before making any decisions.

The financial world is not easy to navigate; there are many options and implications to consider. Take the time to get financial advice specific to your circumstances, and learn how to make your inheritance work effectively for you.

Unsure what to do with your inheritance funds? Please contact TruWealth on 03 8648 6534 or email contact@truwealthadvice.com.au for financial advice.

[1] Deductible debt is that debt where a tax deduction can be claimed. Where a loan is taken out to purchase an asset or assets that will generate an assessable income, then it can be deductible, such as the loan on your investment property or the loan used to purchase a portfolio of investments.

[2] ‘Non-deductible debt’ is a loan that has been taken out to buy a non-income producing asset, such as your home or car, or to pay for personal expenditure, such as a holiday.