Inheriting money is always comforting news. It means a lot to know that the loved one you lost considered their future, and yours! But if you want the benefits of that inheritance to help you and your family over the long term, you’ll want to invest it wisely. What is the best way to invest your gift? The answer depends on your current financial situation, the nature of your inheritance, and your financial goals. Most experts agree on certain guidelines on what you should do first, though.
Kiplingers, for example, puts the spending priorities in this order: First, pay off high interest loans like credit cards and student loans. Then beef up your savings to that you can pay for several months’ worth of living expenses so you are ready for an emergency. Once that is covered you should put money into increasing your retirement accounts, like Roth IRA or other tax-deferred accounts. And finally, if you don’t have an estate plan of your own, use some of the money to create one, including powers of attorney, health care directives, a will, and, if necessary, a living trust. Once those things are taken care of, you can look into investing that money for the long term.
The Motley Fool offers these guidelines for these categories of investment:
Real Estate – Depending on the place, this is usually a very solid investment. You could upgrade your own home, or invest in rental properties. Be warned, however, that being a landlord is often more work than people think it will be. But if you own the property outright, and do not pay a mortgage, you’ll likely make plenty of profit on a long-term basis.
You should know that there are other ways to invest in real estate, too. For example, you might invest in real estate investment trusts (REITs), which are stock-like investments that you can easily buy into and sell out of — unlike actual real estate, which can take longer to buy or sell. A REIT is a company that owns a lot of properties, collects payments from tenants and lessees, and pays its shareholders a dividend from its earnings. REITs often focus on a certain kind of property, such as retail, healthcare, office, and/or residential properties, among others. Alternatively, you might look into mutual funds focused on real estate companies. That’s a good way to spread your money across many real estate-related businesses. For example, consider the Vanguard Real Estate Index Fund (VNQ), an exchange-traded fund (ETF) focused on real estate, sporting a low annual fee of 0.12%.
Stocks – For most people, the best way to grow your money over the long run is via the stock market. The way to aim for the best possible returns is to devote a lot of time to learning about investing and learning about various companies and industries—and then carefully selecting the most promising stocks, holding them, ideally, for many years while keeping up with their progress. Along the way, you’ll learn how to make sense of balance sheets, income statements, and cash flow statements—and how to calculate estimates of various stocks’ intrinsic values.
Clearly, however, that route takes a lot of effort and there’s no guarantee you’ll get outsized returns. Instead, you might just opt for the investment that Warren Buffett recommends for most people: index funds.
Index Funds – Investing the majority of your inheritance in index funds can be a great way to go as they tend to outperform most managed mutual funds, which are run by very educated professional stock analysts and money managers and charge high fees. According to Standard & Poor’s, as of the end of 2018, 89% of all domestic stock mutual funds had underperformed the S&P 1500 Composite Index over the past 15 years, and 92% of large-cap stock funds underperformed the S&P 500.
Index funds exist in the form of mutual funds or ETFs. The SPDR S&P 500 ETF (NYSEMKT:SPY), for example, tracks the S&P 500 index, which is made up of 500 of America’s biggest companies that together represent about 80% of the entire U.S. stock market’s value. You can go even broader with the Vanguard Total Stock Market ETF (NYSEMKT:VTI), which encompasses all of the U.S. stock market, including small companies, or the Vanguard Total World Stock ETF (NYSEMKT:VT), delivering the world market. You can balance out your portfolio with bonds via index mutual funds and ETFs, too.
Index fund investing is easy and inexpensive, and it delivers returns that beat much more costly alternatives.
This article represents a high-level view to give you an idea of how to think about investing your inheritance. A certified financial planner is recommended as they can give you more specific advice more suited to your unique situation. Select one who charges a flat hourly fee rather than working on commission. Here’s more on how to select a financial planner.
The sooner you invest your inheritance the sooner it can start working for you, so if you are in a position where you have to wait a long time for probate to close, you may consider getting an inheritance advance. Here’s more information on how an inheritance advance works.