For Australians, receiving an inheritance often comes during a time of sadness and mourning for a loved one. But it can also be a financial windfall for the recipient.
Australia is currently expected to have the biggest wealth transfer in history.
In fact, it can often be the difference between a relaxed retirement or a stretched one. Now while you might be tempted to spend your inheritance on a big overseas trip or a new car, you can make better financial decisions, which can help set you up for life.
As such, here are few things that you can do with your inheritance.
What is an inheritance?
Put simply an inheritance is the passing down of assets from one person to another, which usually happens after someone has died. Although it's not always the case.
The assets are either valuable or sentimental.
When it comes to valuable assets, this could include property, cash payments, shares or other financial investments.
4 investment options for your inheritance
Now if you find yourself in the position of receiving an inheritance, there are a few things to think about. It is important to determine your own financial situation as well as your long-term financial goals.
As such, key factors that come into it are your levels of debt, savings rates, investments and plans for retirement.
Clear your debts
Before doing anything else with your inheritance, look at how that money fits into your overall finances. Do you have any high-interest debt, such as credit card debt or a car loan? These debts can attract very high interest rates meaning you will pay more than you have to. Credit card interest can be as high as 21%. It’s worth thinking about using your inheritance to wipe some of this debt away.
On the other hand, student loans and the likes can sometimes be tax-deductible so your inheritance may be better spent on other investments.
Set up an emergency savings fund
If you don’t have any emergency savings to bail you out of a tricky situation, you may want to open a savings account and earn interest on your inheritance.
Tucking a small portion of your inheritance into a savings account could cover you for 3–6 months of expenses should you need it. How much you will need in savings greatly differs. In some instances it might be only a few months, in others a bit longer. It all comes down to your personal job security, industry you work in and your life circumstances.
The whole idea of an emergency fund is to spend down the money in times of need, instead of tapping into your investments or long-term savings.
If you are in your 20s or 30s, having an emergency savings account set up with your inheritance will be very useful. If you need to take time off work, travel or have an emergency, you’ll be able to easily access your money.
Prepare for retirement through superannuation
This one is for those who might not need the money straight away.
While adding to your super is tax-effective anytime and can help set you up for retirement regardless, Australians who are later in their working lives might find adding to their super increasingly beneficial.
That is one perk of receiving an inheritance in your 50s or 60s. For anyone in their 50s, putting the entire inheritance into superannuation funds could be the best option. If you are 60 and above, putting the inheritance into super would be more beneficial since your super benefit payments would be tax-free.
If you still have outstanding debt like mortgages or car loans, pay off that debt then put the remaining amount into super.
Build long-term wealth
If you're looking to build long-term wealth or want to pass on assets to your children, stocks and exchange-traded funds (ETFs) might be your best options.
Investing in stocks could be one of the most beneficial things to do with your inheritance. This is because stocks are one of the best-performing long-term assets. If you invest your money in stocks or a basket of stocks (known as an ETF) you can take advantage of strong company growth and dividends. Putting some of your inheritance into a share portfolio could earn you a good amount of money for the future.
There are several good long-term stocks that will produce good dividends and help you have money for the future.
So before blowing all your inheritance in one go, take some time to plan where it would best be spent. Whether you spend it on an emergency savings account, paying off debt or purchasing long-term stocks, plan and assess where your inheritance is needed most.
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Remember you don't have to make a decision straight away
While you don't want to just sit on your inheritance forever, it is important to point out you don't have to make a financial decision straight away.
In fact, you've probably got a few things else on your mind, meaning you might not be thinking clearly.
As such, in most cases it's best not to make a major financial decision straight away. Instead, you could be better off waiting, processing the situation and adjusting once you're in a clearer headspace.
It's also the same when it comes to investing your money. If you've received a large portion of assets or cash, you don't have to invest it all in a single day. In some instances people prefer to slowly add to their portfolio over time.
Tax obligations on receiving an inheritance
Australia doesn't actually have an inheritance or death tax in any of our states or territories, meaning that money can be passed on tax-free.
But there's a catch.
While there is no standing inheritance tax, what you do with the money can face taxes. For example, if you put it into a savings account that received interest, you would pay taxes on the interest that is earned over time.
As such, it is highly recommended that you chat with a financial expert about your taxes and financial situation, if you've inherited a substantial amount of money.
Cameron Micallef was a utilities writer for Finder. He previously worked on titles including Smart Property Investment, nestegg and Investor Daily, reporting across superannuation, property and investments. Cameron has a Bachelor of Communication and Media Studies/ Commerce from the University of Wollongong. Outside of work Cameron is passionate about all things sports and travel.
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