3 Smart Ways to Spend Your Inheritance

The Deceased Laying In A Coffin At His Funeral With Bags Of Money Surrounding Him
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Great news! According to a recent survey from Bankrate.com (RATE) subsidiary Interest.com, there's a good chance that you will soon inherit a share of a vast sum of money.

A recent poll taken by the financial gurus at Interest.com shows that barely a quarter of Americans expect to receive an inheritance in their lifetimes. And yet fully 64 percent of American retirees say that as a matter of fact, yes, they do have some money lying around -- $6 trillion in total, give or take. And they do plan to leave some of it to the younger generations in their wills.

And that's where the trouble begins.

Bad News! There's a Good Chance You'll Soon Inherit Some Money

For most of us, the prospect of getting a windfall inheritance from Grandma, Granddad, Mom, or Pop will be bittersweet at best. On one hand, there's the passing of a loved one. Of course, on the other hand, there's a pile of dough to cushion the blow.

On the third hand, though, that money may not last very long.

As Michael Finke, a personal finance professor at Texas Tech University in Lubbock, told Interest.com, people who receive a small inheritance tend to spend the money rather quickly: "When you receive an inheritance that's under $10,000, you tend to frame that as spending money."

%VIRTUAL-article-sponsoredlinks%Fellow Texas Tech professor Russell James notes that even when larger amounts are inherited, "at least half the people are just going to blow it. And by blow it, I mean 12 months later it's gone."

What do they spend the money on? Interest.com's survey finds many respondents surprisingly candid about how they'd spend a windfall. Nine percent would use the cash to buy a bigger house. Three percent would blow it on jewelry or a nice car. And 3 percent would take a vacation.

The Road That's Paved With Good Intentions

These aren't the best choices, of course. And most people say they plan to take better care of any money they should inherit.

Certified financial planner Erin Baehr of Baehr Family Financial in Pennsylvania points out to Interest.com that among her clients who expect to inherit money, the three uses for the inheritance most often mentioned are to "pay off their mortgage, pay for their retirement and pay for their kids to go to college."

Interest.com's survey found these same choices to be the most popular options nationally, with about 72 percent of respondents saying they'd either save an inheritance windfall, use it to pay down debt, or spend it on education.

The Big Three

Compared to blowing an inheritance on jewelry, McMansions, and Hawaiian vacations, there's no question: Saving, paying down debt, and getting an education are better ways to use an inheritance.
They also tend to echo the advice of many financial planners, whose road map to financial security generally runs in three major phases:

First,set aside a rainy-day fund. Six to 12 months' wages is the usual benchmark to ensure you're sufficiently "liquid" to withstand short-term financial turmoil, and won't be pressed to find cash to deal with any of life's little surprises.

Second, once that rainy-day fund is established, pay down high-interest debt (credit cards, car loans) first, then move on to lower-interest debts (student loans, home mortgages). Savings need to come before debt paydown because you don't want to get stuck in a situation where you've paid off your debts, then get surprised by a big bill when you have no cash to pay it, and wind up having to go right back into debt.

Third, once you're debt-free and have your rainy-day fund established, any "extra" cash left over can be invested for the future. Ordinarily, this advice refers to investing in stocks, bonds, and mutual funds. But given that unemployment rates for college graduates these days are just half the rate of unemployment for high school graduates, "investing" in your kids' education seems a perfectly valid corollary -- and one that could pay dividends in the form of bigger paychecks.

As a matter of fact, with the stock market as richly valued as it is these days, using an inheritance to help Junior achieve a college degree and the higher earnings potential that goes with it just might help secure your retirement as well.

Motley Fool contributor Rich Smith has no position in any stocks mentioned.

Famous Legacies (and Fortunes) Left In Limbo
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3 Smart Ways to Spend Your Inheritance
Like many young people, 27-year-old singer/songwriter Amy Winehouse didn't have a will when she died in 2011. With an estate worth roughly $4.7 million, Winehouse's parents ended up claiming her assets after her death. Although Winehouse had been married to Blake Fielder-Civil in 2007, they were legally divorced in 2009, and without any children, Winehouse's parents were entitled under British law to the entire estate.
Guitar hero Jimi Hendrix died without a will in 1970, and ever since, his estate has had to deal with a family fight. Hendrix's father ended up taking over the estate as the next of kin, but Hendrix's brother fought over rights to use Hendrix's name and images for decades. Part of the reason for the ongoing battle: Hendrix's estate continues to generate income from music royalties and other sources, and publicity rights remain extremely valuable.
The author of the popular novel The Girl With the Dragon Tattoo and its Millennium Trilogy sequels died nine years ago at the age of 50, but he didn't leave a will. As a result, the laws that govern people without wills in Sweden gave his substantial estate to his father and his brother, cutting out life-companion Eva Gabrielsson. Despite a long battle that dealt not only with financial issues but also with Gabrielsson's criticism of changes made to the novels after Larsson's death, the popularity of Larsson's work will likely continue to raise the issue of his estate's earnings in the future.
When he died 10 years ago at age 58, Grammy Award-winner Barry White didn't have a valid will despite having suffered a long history of illnesses. The famous singer's second wife and widow, Glodean James, was named administrator of White's estate, despite their having been separated. But Katherine Denton, who was White's longtime girlfriend and the mother of White's daughter Barianna, claimed that she was owed money and assets from the estimated $20 million estate to fulfill promises that White allegedly made to her. In addition, disputes between James and White's first wife complicated matters further.
Entertainer and politician Sonny Bono died 15 years ago without a will. As a result, both then-wife Mary Bono and ex-wife Cher ended up making competing claims to his estate. On top of that, a person who claimed to be Sonny's son also argued that he was entitled to collect.
Aviator and film producer Howard Hughes was the man behind the movie "Hell's Angels" and had a storied life as a business giant, but he continued to generate drama after his death in 1976. Although a purported will called for the estate to be split among charitable organizations, corporate managers, and current and former family members, a Nevada court ruled that the document was a forgery and declared it invalid. As a result, the multibillion-dollar estate went to 22 cousins, with proceedings taking about seven years to resolve. Moreover, actress Terry Moore, who claimed that she married Hughes, got a settlement from the estate in 1984.
Even if you're not a celebrity and don't have a celebrity's fortune, you owe it to your loved ones to make sure you have a will. For more on wills and estate planning, check out this list of the important documents you should have.
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