Do you know what to do with inheritance money or any other windfall? I received a question like that from Nancy a few weeks ago. Here’s the situation.
Nancy and Jim are both 31. They have two small children. They rent an apartment and have almost no debt. When Jim’s great-aunt passed away, they inherited $350,000. Jim asked me what he should do with the inheritance money.
Before I could answer Jim and Nancy, I had to learn more about them. They were considering buying a home and/or a business. Nancy was a stay-at-home mom. Jim had a stable job, but his income was modest. They were just able to squeak by with the money he brought home. They looked into buying a few different business franchises. They were also interested in setting up some retirement accounts and putting some aside for the kids’ college. What would you suggest they do?
My first piece of advice was for Jim to buy some term life insurance. Since Jim was the only current wage earner, the family simply had to buy enough life insurance on him before doing anything else.
Next, we all agreed that the big issue was income. This wonderful couple wasn’t spending too much – they simply weren’t earning enough. They already realized this but it was important to call it out. While l loved the idea of buying a home, I suggested that they wait. They first needed to increase their income before taking on more financial obligations.
If Jim were to lose his job and they had a mortgage, real estate taxes and insurance payments to make, they took a real chance of losing everything. On top of that, they had a bankruptcy a few years ago and didn’t have a high enough credit score to get a mortgage.
Jim and Nancy were thinking of buying a business. They asked me what I thought of two different franchise ideas. I told them I could evaluate them, but I’d have to charge them for my time. A better idea would be for them to do lots of investigation on their own and then go to small business people they knew who were successful and talk the ideas over with them. That is the very best way to get a well-rounded objective evaluation. Also, since the couple didn’t have a lot of small business experience, I wanted them to take this step very slowly and think it all through very carefully.
I suggested that they put $75,000 aside for a business and the rest to be invested very conservatively. I told them that once they either have a side income or business income coming in (over and above what Jim brought home), they could use the balance of the inheritance to buy a home. Since it might take them a couple of years to ramp up their business, the money should be invested very conservatively.
Jim and Nancy seemed very satisfied with this game plan. What would your suggestions be? What different advice would you offer? If you have received an inheritance, what did you do with it?