If you have recently recieved an inheritance, I am sorry for your loss. Money comes to us, under these circumstances, with complex emotions. As a result, we often treat it differently to money from other sources.
The average Australian leaves over half a million dollars to distribute from t their estate when they die. Each beneficiary recieves on average $79,00 and this is growing above inflation annually. The wealthiest 20% of the country recieve more than their fair share of inheritance (38%), widening the wealth inequality in Australia. Wealth families are able to prioritise education, and have financial education, as well as gifts to pass on to the next generation. It’s natural to want to give kids a helping hand. But beneficiaries are getting older, as parents are living longer. The most common age to recieve an inheritance is now 55-59 years of age.
Are you reading this because you have, or expect to recieve an inheritance? It would be a shame not to maximise this sad gift and opportunity.
How to Spend Your Inheritance: Slow Down
If you have recently experience the death of a relative, now is probably not a great time to make major life decisions. Put the cash in a mortage offset, term deposit or bank account and give yourself some time. The time needed probably depends on your relationship with your generous benefactor, your emotional state and whether you have a financial plan already written up.
If you have already spend the time creating a written financial plan, there may be very little decision making to be done. You can use (most of) your inheritance to get ahead with your investments.
Should I Get Professional Advice? Do I need to pay tax?
If you have a large inheritance (say, over $100,000) you may feel the need for professional assistance. Take care choosing a trustworthy advisor, with this amount of money you can easily become a target for unscrupulous scammers.
If you are recieving superannuation as a non-dependent, there are tax complications that you should get professional advice about. Otherwise, there is no inheritance tax in Australia. The ATO will consider the value at the time you recieved assets as your “cost base” and only tax income or capital gains above this if and when you decide to sell.
Pay off Debt
If you have any high interest debt, such as credit cards, car loans or personal loans, this is your opportunity to get back on track.
Be warned though, without a change in your earning/spending behaviour, you will fall back into debt, and will have given away your inheritance and have nothing to see for it.
“Bad debt” is debt incurred for liabilities, or purchases that decline in value over time (car, computer, clothes..). For these, you are paying interest and losing money in value at the same time. They should be paid off as soon as you have a strategy to avoid falling into the same trap.
“Good debts” are debts incurred for assets that are expected to provide you with income, or capital gain over time. Education expenses, home loans and investment loans are generally considered good debt, although I have explored the detail of this in Good debt, bad debt, whats the difference.
You could pay off your mortgage, a good, defensive move if you are planning a drop in income in the near future. Parental leave or burn out prophylaxis?
Paying off investment debt is slightly less efficient, considering it is tax deductible. This would be another great defensive move for those already getting close to their desired retirement age (or those with enough cash in investments).
Saving accounts pay so little interest at the moment, it’s almost zero. Consider, over the long term inflation will devalue your money, you are actually losing money by keeping it in a bank account. If you have a mortgage offset, you at least will be beating inflation.
Save your money for a period of time to educate yourself and explore your options. Keep it in a savings account for the minimum required, and only if you are saving for a specific purpose. Otherwise, if you have many years (10+) until retirement, consider investing your inheritance.
You have broad options of the stock market (most would consider passive investing using ETFs), a bond index (this is not an investment bond) for those wanting less risk and willing to tolerate lower long term returns, residential or commercial property.
Whatever you choose should be part of a well thought out plan. Passive Investing Australia has a well set out and logical site educating readers about the stock market.
For a double high taxed couple, super, property or LIC with a dividend substitution plan. Superannuation is an easy way to invest your money, you can dollar cost average into your account without brokerage. It won’t let you panic and withdraw your cash before preservation age. You may even be able to get some tax breaks if you are not already maxxing out concessional contributions.
Property investment with high capital gains potential (expected increase in value over time) is also a tax efficient and leveraged way to use your inheritance, depending on your risk profile.
Blow it Wisely
The thing to avoid here is accidentally spending your money. It can easily just gradually disappear from your account, with rounds of drinks, new clothes or shoes, car repairs etc. No matter how small your inheritance, honour your benefactor by spending your gift consciously and wisely.
If you have an account you can keep it separate from your day to day spending this is helpful. A fabulous holiday, car upgrade, piece of jewellery or swimming pool aren’t a wasting your inheritance if it is something you truly value and will not look back on without regret.
Unfortunately, us humans are terrible at predicting what will make us happy. Take your time and ponder.
Before treating yourself, though, make sure you have a financial plan and that you are on track to hit your goals. If not, strongly reconsider using your inheritance to move you towards your goals, rather than away.
For those planning on investing their inheritance, a small amount spent on something personal in honour of your loved one is a nice gift for yourself.
I recieved a token $200 inheritance, as one of many grandchildren. I purchased a necklace to honour my wonderful grandmother.
The second inheritance, from my other grandmother was more substantial. $20,000 isn’t a life changing amount. But it does have significant potential to start an investment. I recieved it in my expensive 30s, with a large (ish) mortgage and hoping for children in the near future, money felt tight.
A wise move would have been to use this gift to start a regular investment into an ETF. Or I could have used it to pay down the mortgage (a little) and save up for planned parental leave.
I did neither of those things, I blew it on putting a pool into our yard! My grandmother was terrified of water until aged 70, when she learnt to swim (I’m actually not sure what prompted this!)
So it seemed rather appropriate, therefore, to use her gift to build a pool. My two kids have learned to swim, and played for hours in our pool, and it brings our family incredible joy. With COVID lockdowns, I appreciate our luxuries at home more than ever. Nan left my grandfather, who survived a few more years, kind of lost without the boss (nan).
My grandparents were always frugal, perhaps they are who I got my interest in finance from. Despite, I imagine, not a fabulous income, they had saved large amounts of cash and paid off their home by the time my grand father died. This was stashed in a bank, so I guess they hadn’t found an interest in investing. Better than under the mattress!
I recently recieved the bitter-sweet gift of an inheritance from my grandfather, almost $60K. As well as the inevitable emotions, this money is substantial enough to come with responsibility as it’s custodian.
At the moment, this money is sitting in an offset account. My plan is to dollar cost average into ETFs, while slowly paying off the mortgage at the same time.
My Planned Inheritance
Right or wrong, I hope to give my children a helping hand as they grow up. I’d like to pay for their tertiary education costs if they attend, or perhaps contribute to their first home. We also plan to leave our (hopefully paid off) properties as an inheritance. More importantly, I think it is so important to teach children the skills to handle their money effectively.
“Hard choices, easy life. Easy choices, hard life”
Spend some time thinking through the most valuable use for your inheritance (and I don’t just mean in a financial sense!) Pay off bad debt, treat yourself carefully and consciously, and research investment options. Honour your benefactor by not wasting a dollar.