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What to do with an inheritance windfall


RateCity Staff

By RateCity Staff

4 min read

Receiving an inheritance can be a great financial boon, but it can also be overwhelming when faced with the quandary of what to do with the money. Should you blow it all on a luxurious holiday, pay off the mortgage or invest it in shares?

The best option for you will depend on your age and goals, but no matter how old you are there is one requirement that remains the same: have a strategy on what you will do with the money.

Marc Bineham, director at Noall & Co and vice president of the Association of Financial Advisers says people without a plan are at risk of blowing it.

The age question

“Most people who receive an inheritance are usually older and fairly close to retirement,” Bineham said.

“If the average person passes away at 82 or 83, their children are going to be in their late 50s.”

For anyone in their 50s, Bineham recommends putting the entire inheritance straight into their superannuation fund. If you are 60 and above, this is even more beneficial because your super benefit payments will be tax-free. If, however, you still have a mortgage or other significant debt, “pay off the debt and put the balance into superannuation.”

“Having a mortgage hanging over your head when you want to retire is not a good thing,” Bineham advised.

RateCity Money Editor Sally Tindall said inheritors aged in their 20s, 30s and 40s, should think about paying off debt as one of the first ports of call.

"If you have any debt – particularly credit card debt – its worth thinking about wiping the slate clean as these cards can carry up to 21 per cent interest.

"Paying down the mortgage is also another good idea. Home loan interest rates might be at record lows right now, but they will go up over the course of your loan so the less you owe the bank, the better," she said.

If you do not own your own home yet, the inheritance could be the perfect leg up to home ownership.

“There are plenty of advantages in getting into the property market early,” Bineham said.

For 20-somethings, Bineham recommends using 80 percent of the money to buy a home and saving 20 percent in a seperate high-interest savings account as an emergency fund.

“If you put all the money into a house, you are locking that money away,” he said.

“If you have an emergency and have to take time off work or decide to travel, you won’t have access to that money. Another option is to ensure you have a home loan with a drawdown facility, which gives you flexibility if you need the money.”

Plan before you act

Take some time to plan how you will invest your inheritance to ensure you make the most of it. A great thought-starter would be to consider your benefactors intentions; ask yourself what you think they would have wanted you to do with their valuable assets.  

If you want to have your cake and eat it too, a sensible equation is to save 20 percent of the inheritance for a rainy day, spend 30 percent on a splurge and use the remaining 50 percent towards your debt.  

"Working out how the money will be carved out is a really important step," said Tindall. "Holidays are a great treat, particularly if you haven't had one for a while, But before you go, take a moment to map out a holiday budget so you don't blow it all in one go. A lot of people tend to stick to a plan better if its written down on paper," she said.

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