Receiving an inheritance is exhilarating news, but it can present challenges. It takes away a bit of the pain of the recent loss. The general question, of course, is what do you do with the money? Some inheritances are small and some can be quite large. For some, the inheritance might have no impact at all, while for others, it could be a life-altering event. While an inheritance is a good problem to have, it is a good idea to do your best to protect this new asset.

The inheritance is a bonus, a windfall. In most cases, the inheritance is spent in anticipation long before it is received. As with lottery winnings, I suspect that most inheritances have disappeared within the first few years. To refrain from ones initial impulse to spend the money is vital.

Another common occurrence is that the inheritance is turned into family money, when it could be used for specific purposes. Like any gift, an inheritance is not considered marital property, so it could be used to protect the recipient in case of a divorce or other civil matter affecting the spouse. This inheritance could be a vital resource to a non-working spouse, for example.

The key is to keep the inheritance separate from all other monies. Open a separate checking account and keep the money in an individual account, rather than placing the funds in the joint account. For significant amounts, a trust can be used to encourage certain behavior or provide funds for certain milestones or events.

The other thing to think about is how to get the best bang for your buck. For example, if you have an old clunker that costs too much in repairs, buying a new car may have a lasting benefit. You can buy it for cash and skip the car payment. In a way, that saves you $400 per month, for example. Whether you inherit $1,000, $10,000, or $100,000, there are choices to make. Pay off a credit card. Reducing debt will save a lot of money.

Or, you could invest the funds, make the car payment out of the investment returns, and have both a car, and a little of the inheritance left over for something else. You could pre-fund a college account, allowing you to strike one huge expense off your list of things to worry about.

A great way to think about an inheritance is to focus on the income stream it can produce (or save) versus the actual dollar amount. That way you increase your chances of keeping the inheritance for the long-term. For example, if you inherit $100,000, you could buy a summer cottage and hope that you can make the expenses over the long-run. Or you could buy a $100,000 care, and then try to handle the long-term maintenance expense and insurance from your income. But these actions add expenses to a usually already strained budget.

If you invest the $100,000 and use the $5-6,000 in earnings every year to improve your quality of life, you are giving yourself additional financial security and you are ensuring the ability to maintain the change in lifestyle. Take the $5-6,000 and put them in a college fund or an IRA. Take that money for a car payment, a new TV, or to cover the utilities for a second home.
An inheritance is a good problem to have. However, it is important to be thoughtful about what to do with the windfall, no matter how large or small. The emotions involved in dealing with a recent loss may have a detrimental impact on the decision-making process. As part of the grieving process, we tend to indulge ourselves to provide periods of joy during a time of sadness. The key is to be mindful of the big picture when making financial decisions.

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