What Should You Do with an Unexpected Inheritance?

An unexpected inheritance can be both a blessing and a challenge. It often comes with a mix of emotions, from gratitude to the bittersweet reminder of loss, and raises the inevitable question: What do I do now? For many, the initial thought might be to take a big vacation, buy a dream home, or pay off debt, but each choice has its own pros and cons that are worth considering more closely. Let's explore these options in a realistic way.

Imagine inheriting $200,000 in your mid-40s. It's a significant amount, but not enough to completely change your life. You could pay off a big chunk of your mortgage, set aside money for your kids' education, or invest in different assets. But the right choice isn't just about looking at the numbers. It depends on your age, current financial situation, and long-term goals.

1. Debt Repayment: The Mirage of Relief

One of the first choices often floated is using an inheritance to pay off debt—particularly a mortgage or high-interest loans. There is comfort in the idea of owning your home outright or no longer dealing with credit card bills that have gnawed at your peace of mind. Financial freedom has a very literal connotation here.

Pros: Debt repayment yields instant gratification. A mortgage-free existence or eliminating high-interest liabilities provides peace of mind and tangible monthly savings. Paying off loans can free up cash flow for other priorities, and psychologically, it’s akin to lifting a weight off one’s shoulders.

Cons: The problem with focusing on debt is that once the money’s gone, it’s gone. When you pay off your mortgage, you've traded liquidity for a slower, albeit secure, growth in equity. The capital is now tied up in an asset you might not need immediate access to. And if you're at an age where building wealth for retirement is crucial, it’s worth considering if redirecting that money into higher-yielding investments would generate more long-term value. After all, a mortgage at 3% interest doesn’t feel quite as heavy when you could earn 6-7% elsewhere.

2. Investing for the Future: The Power of Compounding

The second option involves investing that newfound wealth—letting it grow and harness the powerful mechanism of compounding. This is especially relevant for younger individuals or those approaching retirement with a strategic timeline.

Pros: Investing opens avenues to amplify the inheritance far beyond its initial value, particularly if time is on your side. Consider a diversified portfolio of index funds, real estate investment trusts (REITs), or even adding to your existing 401(k). Done prudently, investing can transform a modest sum into an income-generating behemoth over a couple of decades. History has shown that those who possess the courage and patience to stay invested—through market downturns, inflationary fears, and media-induced panic—ultimately reap the rewards.

Cons: It’s easy to get intoxicated by stories of someone turning an inheritance into millions through savvy market moves. But the truth is, investing is never devoid of risk. It involves embracing volatility and trusting a process that doesn’t always provide immediate returns. If the inheritance in question is your financial safety net, investing the majority of it into equities or other high-risk ventures might not align with your personal risk tolerance. Furthermore, when inheritance arrives during times of economic uncertainty, even seasoned investors can hesitate, torn between the opportunity of a down market and the fear of further loss.

3. Splurging: Gratification with Caveats

Sometimes, an inheritance should be enjoyed—especially when it serves as an emotional reminder of a loved one. This option—often deemed the least “responsible” by conventional wisdom—has merit, particularly if it’s well-planned and within the confines of one’s broader financial strategy.

Pros: The greatest advantage here is immediate happiness. A well-earned splurge, like funding a once-in-a-lifetime vacation or investing in something you've always wanted, isn’t merely about indulgence. It’s about honoring the memory of the person who enabled this newfound flexibility. A strategic splurge, where you still preserve a portion for future needs, can also provide the emotional boost that keeps the mundane routines of saving and budgeting sustainable in the long haul.

Cons: The risk, of course, is emotional spending spiraling into financial regret. When the primary focus is instant gratification, it’s easy to go overboard—ending up with assets that depreciate or offer no long-term value. History is replete with tales of squandered inheritances—where impulse overrides sound judgment and a fleeting sense of freedom ultimately becomes a financial liability.

4. Philanthropy: Wealth for the Greater Good

For some, an unexpected inheritance might offer the chance to make a mark through philanthropy. Charitable giving is a deeply fulfilling use of an inheritance, potentially honoring the values of the one who passed away.

Pros: Besides the intangible benefits of altruism, there are tangible perks as well—donations can provide substantial tax deductions, helping offset tax burdens from other income. More so, contributing to causes you care about can be immensely satisfying, and create a legacy that outlives you.

Cons: Unlike investments, once given, charitable gifts won’t offer a financial return. There’s also the question of whether the timing is right—could giving away a portion now impair your ability to fund personal financial goals later in life? The key is finding balance—philanthropy, yes, but in harmony with your own financial wellness.

Tailoring the Strategy to Your Life Stage

Your age and financial circumstances should be your north star when deciding what to do with an inheritance. A 30-year-old still scaling the corporate ladder might lean towards investing, focusing on maximizing growth while time is in their favor. On the other hand, someone in their 60s, approaching or enjoying retirement, may opt for a combination—paying down remaining debts, setting up income-generating investments, and perhaps gifting to children or grandchildren.

Moreover, consider the type of inheritance itself. If you’ve inherited a retirement account, there are distribution rules that demand careful attention; cash and stocks present different liquidity options, while real estate may pose a host of considerations regarding maintenance, rental income, or sale.

The Common Thread: A Customized Balance

There’s no universal answer, only a universal necessity: balance. The ideal strategy often involves a mix of these options, ensuring that your present is secure without compromising the opportunities of your future. Perhaps that $200,000 means $50,000 to reduce debt, $100,000 to invest for future growth, $20,000 for a dream vacation, and $30,000 set aside for charitable giving.

Every choice comes with a trade-off, and it’s important to ask not just “What can I do with this money?” but rather, “What outcome will make me proud in five, ten, twenty years?” An inheritance is more than dollars and cents—it’s an opportunity to reset the financial course, to live intentionally, and to make meaningful decisions with a lasting impact.

Wealth is ultimately what you make of it. Worry less about losing it, and more about using it in ways that truly reflect your aspirations and values. Because the real inheritance isn’t the money—it’s what you choose to build with it. If you're unsure about the best approach, give us a call. We're happy to offer a complimentary inheritance planning meeting for those who mention this post. We'll help you create a personalized strategy that aligns with your goals and ensures you're making the most of your inheritance.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.