Receiving an inheritance, especially a large sum of cash, is often a complex mixture of emotions. You may feel a sense of relief, responsibility, and maybe even a little overwhelm. While it may seem like it would be a great idea to make immediate, sweeping changes in your life, really, the best first step is to slow down and create a thoughtful plan.
Here’s a practical guide for inherited funds management and setting yourself up for long-term financial success.
Phase 1: The Immediate & Necessary Steps
Before planning a dream vacation or purchasing a new car, here are a few essentials you need to do right away.
- Hold Your Horses (The 6-Month Rule)
The single most important piece of advice for inheriting a large sum of cash is to do nothing drastic for the first six months. This “cooling-off” period will give you a chance to process both emotionally and logically what has happened to you.
Action: Park the money in a safe, liquid, and easily accessible place, such as a high-yield savings account or a money market fund. This gives you a small and safe return while you devise your long-term strategy.
Avoid large purchases, quitting your job, or making high-risk investments immediately.
- Seek Professional Advice
Handling a large inheritance is not a DIY project. The money you spend on professional advice will likely save many times that amount in mistakes.
Financial Advisor (Fiduciary): A fee-only fiduciary is bound by law to make decisions that are in your best financial interest. They can assist with the inherited funds management and all areas of planning.
Tax Professional: Either through an accountant or a tax attorney, you need to know the consequences of the inheritance in terms of taxes. Depending on your jurisdiction and the type of asset involved, there might be state, federal, and estate taxes.
Phase 2: Develop a Strategic Spending Plan
Now that you have a professional team and a clear head, it’s time to assign roles to your money. Remember, your inheritance is much like a pie, so give a slice to whatever needs it most. while maintaining disciplined cash flow management to ensure your funds last and support both short- and long-term goals.
- Eradicate High-Interest Debt
This is often the most powerful use of any unexpected windfall. Using the inheritance to pay off high-interest debt provides a guaranteed “return” equal to the interest rate you are avoiding. This is the core component of handling large inheritance funds efficiently.
Priority: Credit card debt, personal loans, or high-interest lines of credit.
Consider: If your mortgage or car loan is at a high-interest rate, a partial or full payoff of it may be wise.
- Max Out Your Emergency Fund
Most people’s emergency funds cover three to six months of expenses. With a large inheritance, you can now solidify this foundation.
Goal: Fully fund your emergency savings for 6 to 12 months of living expenses. This is your personal financial safety net, protecting your long-term investments from needing to be sold during a crisis.
- Save for Mid-Term Goals
Before you leap directly to long-term investing, allocate funds for goals you would want to achieve in the next few years.
Examples include: putting a down payment on a house, financing a home renovation, or paying a child’s college tuition sometime in the foreseeable future.
Phase 3: Long-Term Growth & Legacy
This is where you implement strategies for large cash inheritance to secure your future.
- Invest for the Long Term
The majority of your inheritance should be put to work through strategic, diversified investing. Your financial advisor will be key in this regard.
Retirement accounts: Max out the tax-advantaged accounts available to you: 401(k), IRA, or Roth IRA.
Taxable Brokerage Account: Invest the rest in a diversified portfolio of low-cost index funds or ETFs.
Diversification: Do not put all of your eggs in one stock, sector, or investment; widely spread the risk.
- Consider Your Estate and Gifting
A large amount of cash is the perfect catalyst for a review of one’s own financial and estate planning.
Update Your Will: Your legal documents should be updated to reflect your current wishes and financial situation.
Review Beneficiaries: Verify that beneficiary designations for all of your accounts-including insurance and retirement accounts-are current.
Strategic Gifting: If you want to provide for family or causes, you can give annual gift exclusions to pass money tax-free.
Your Next Step
Receiving a cash inheritance is often a great opportunity. By focusing first on professional advice, paying off debt, establishing a strong safety net, and investing wisely, you can be confident this gift will make a lasting positive difference in your financial future.