Investing an inheritance is a significant financial decision that requires careful consideration and planning.
While the initial situation and amount of money inherited may come as a surprise and arrive suddenly, it is important to keep a level head, strip out sentimentality, and focus on making the most of your new-found wealth.
Here are some general steps to guide you in the process:
Evaluate your current financial situation and unique financial goals
Determine your short-term and long-term financial goals.
These goals could include buying a house, saving for retirement, paying off debts, or funding education expenses.
Understanding your objectives will help you develop an appropriate investment strategy.
Take stock of your existing financial situation, including your income, expenses, debts, and any existing investments.
Your age and life stage will also impact what is important to you. In your thirties it may be the goal of home ownership, or in your forties supporting a growing family.
Your fifties may involve paying for university fees, driving lessons, and helping older children enter adulthood.
In your sixties or seventies, your goal may be to support your income needs, or protect your wealth from inheritance tax.
Create an emergency fund
Before investing, set aside an emergency fund with three to six months' worth of living expenses.
This ensures that you have a financial safety net in case of unexpected expenses or job loss.
To minimise the chances of ever needing to use your emergency fund, assess your risk tolerance, which refers to your ability to handle market fluctuations and potential investment losses – your financial adviser will be able to help with this.
Pay off high-interest debts
As previously suggested, your debts will likely be linked to your age and life-stage and may include a student loan, mortgage, or other home loans, credit card debt or other high-interest amounts.
If you have any high-interest debts, consider using a portion of the inheritance to pay them off.
This can help improve your financial situation and reduce interest payments.
Interest on debt is often much higher than on savings or lower risk investments – it makes little sense to open an ISA for example at a 4.5 per cent return, whilst also having outstanding credit card debt with an interest rate that’s four times higher.
Establish an investment plan
Having financial eggs in several baskets is a good idea if you’re new to investing or have a limited amount to invest.
If this is your first time, determine the right investment strategy based on your goals, risk tolerance, and life-stage.
To spread the risk, consider diversifying your investments across different asset classes, such as stocks, bonds, property, and other investment funds.
You’re taking the first step to investing inheritance money well right now, by reading this guide!
Take the time to educate yourself about investment options, market trends, and investment strategies appropriate to your situation.
Understanding the basics of investing will empower you to make informed decisions and potentially achieve better results.
A financial adviser will consider your personal situation and discuss your goals, educating you on available options.
Start investing gradually and remain patient
Spend in haste, repent at leisure. There are several good reasons to take a gradual approach rather than diving in head-first, including the sentimental reasons attached to inheritance money.
It’s difficult but try not to be swayed by what you think the benefactor would have wanted.
Market conditions may have changed, and your personal situation may not match their wishes.
So, rather than investing the entire inheritance at once, consider a gradual approach.
This technique involves investing a regular, fixed amount, regardless of market conditions and can help mitigate the impact of market volatility.
Investing is a long-term endeavour, and it's important to remain patient and avoid making impulsive decisions based on short-term market fluctuations.
Stay focused on your goals and maintain a disciplined approach.
Monitor and adjust your investments
Unless you have chosen a financial adviser to manage your savings and investments, you will need to regularly review your investment portfolio and make adjustments as needed.
Market conditions and your financial goals may change over time, so it's essential to stay informed and adapt your inheritance investment options accordingly.
Ensure you put specific dates in the diary to review your investment performance and adjust accordingly.
Seek professional advice
Arrange an initial meeting with a financial adviser or investment professional who can provide personalised guidance based on your specific circumstances.
They can help you develop a suitable investment plan, select appropriate investments, and monitor your portfolio over time.
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