If you receive an unexpected inheritance, what do you do with it? The generation that went to work after World War II experienced an unparalleled period of prosperity. You may not get the opportunities that your father and grandfather did. But your inheritance may make up for that. The question is how to invest your inheritance to create a nest egg for retirement and a better life along the way. What are the first steps that you need to take?
Get Rid of Credit Card Debt
The first step before you start investing your inheritance is to get rid of any high interest debts such as credit card debt. It is not easy to make a return of eighteen percent per year per year on your investments. But that is what you are probably paying on credit card debt. Pay off your credit card debt first and foremost.
Mortgage Interest Is Deductible
The best long term investment is in your home. Every cent of interest you pay on your home mortgage is deductible from your federal taxes. Own the home you live in and do not pay rent that goes into someone else’s pocket. How to invest your inheritance is to start by putting money down on your own home. Along the way do not forget that you will need to service the mortgage so do not get in to a home that is so expensive that you will be bankrupted if you lose your job. And if your inheritance is sufficiently large you can simply buy with cash.
Rainy Day Fund and Tax Advantaged Savings
The first part of financial planning after getting rid of debts is to create a financial buffer. The most common way to do this is to put enough money in the bank to cover six months of expenses. Then take advantage of an IRA and a 401K from work. These vehicles allow your savings to accumulate tax free until retirement. Now, once you have done the ground work here is how to invest your inheritance.
Investment Time Horizon:
You will choose different stocks if you have ten years until retirement versus forty years. Common wisdom for those nearing retirement is to choose stable stocks and ones that pay dividends. If you have two or three decades to go until you quit work you may want to choose growth stocks that will give you a shot at really spectacular growth. Obviously if you pick a stock like Microsoft when it first went public you could see your initial investment appreciate two thousand fold. And if you are nearing retirement now the Microsoft of today is not a bad bet as it is stable and pays a reliable dividend. You can take more risk if you have more years to invest as there is time to make up for any losses.
If you want to sleep soundly at night do not get into risky investments. And if you simply cannot afford to lose any money invest in solid stocks with a long history of returning value to investors.
Diversification is what allows you to mix and match your stock investments often cushioning losses in one sector with gains in another. This does not mean that you invest in a hundred stocks. But it may mean that you invest in half a dozen. You can certainly invest in more stocks but you need to stay current on how these stocks are doing and their near term prospects. This is called fundamental analysis and if you have a day job you will not have time to keep track of dozens of stocks. You need to learn about intrinsic stock value and how to let it guide your investments.
These are the basics of how to invest your inheritance. There are more details to follow.