Inheritance coming your way this year? Planning for it means you won’t waste it

If a windfall of inheritance money will be deposited in your bank account this year, it pays to be financially strategic with it.

Follow these steps to make the most of this meaningful money:

Step 1: Step back and set out some life goals for the next year or two

What’s on your vision board? Your sticky-notes? Your goal list? When you are clear on your goals, it’s easy-peasy to focus your inheritance money on achieving these aims, and avoid wasting it on purchases that don’t help you meet your vision for the future. The goal-setting sweet spot is having two or three achievable aims that excite you, things like freedom from debt, beefed up retirement savings, a trip to honour your late grandmother, who left you this money, and so on.

Step 2: Strike a balance between enjoying some today and taking care of your future self

Regardless of the size of your inheritance, it’s a great idea to earmark some of the money for yourself, and your wellness, today. It’s reasonable to set aside between 10 per cent and 30 per cent of the money for the here-and-now. Customize the percentage with your financial adviser.

Depending on your goals from Step 1, this money could be used to spend on, or invest in: a yoga membership; hiring cleaners to deep clean your home; fixing your jaw alignment with braces; paying for a course to upgrade your skills; taking a holiday with your family; or renovating a part of your home.

Step 3: Hive off a meaningful portion to put toward your long-term financial wellness

Lump-sum inheritance money is a huge opportunity to make progress toward long-term financial security, too.

If you have consumer debt, such as credit card balances, pay that off! You’ll save loads of money on interest, and benefit from reduced financial stress. You will see your cash-flow improve significantly, by not having these payments any more, and you can use that money for your investment portfolio, for example.

I also recommend socking away a portion of your inheritance for your retirement. By investing that money well for the long-term and according to your risk tolerance, your nest egg will grow through the power of compound interest and reinvested returns. When you contribute to your RRSP (which is a means of saving on tax today and paying it in retirement) and TFSA (in which your money grows tax-free) you can stretch this windfall money even further, because these accounts are “tax-advantaged.”

Step 4: If mortgage freedom is the goal, be strategic with how your apply the inheritance money to the balance

The opportunity to clear your mortgage completely (or a good chunk of it) might be available to you. Before you go ahead and wipe the balance, find out how much interest you could save by paying the whole thing out at once, and compare that to the fees you’ll pay to break your mortgage. Next, consider the foregone opportunity to invest that money, instead.

This is definitely where working with a qualified financial adviser can help you work through the scenarios. You may find that you’d be better off shifting your mortgage payments to double-up accelerated payments, and making lump-sum contributions on the anniversary of the mortgage (to your maximum limit without penalty) until the mortgage is up for renewal, and then pay it out. You may find you would benefit more, long-term, from investing the money through your RRSP and TFSA, not putting it all on the mortgage today.

Step 5: Earn interest while you organize your goals and meet with your financial adviser

The interest rates being offered on high-interest savings accounts (HISAs) are very attractive at the moment, relative to the past decade. Earn interest on the windfall money you’ve received as you take the time you need to prepare to execute your goals. In other words, don’t leave this large chunk of money sitting in a chequing account earning absolutely nothing. Double-confirm your HISA has deposit insurance.

Whoever gave you this money, living or dead, probably wants you to be mindful with how you use it, and to be a bit happier. So, enjoy it responsibly!

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.