How to Make a Modest Inheritance Go Farthest

If you’ve inherited some money—even if it isn’t a lot—congratulations! You could just go out and spend it, of course. Or you could invest it in something more meaningful to you.

Before doing anything with the money, give yourself a little time to regroup. Inheriting money—even a modest sum—can bring up emotional decisions, especially if it came from someone close to you. Taking a pause can help you make choices that align with your long-term goals.

Here are five simple steps to make a modest inheritance go the farthest.  

1. Don’t Rush

Take a moment to assess your financial picture and resist the urge to spend impulsively. A calm, thoughtful approach will help you make smarter choices.

2. Park It Someplace Safe

Rather than an everyday bank account, look for one that will at least earn you some interest. Mari Adam, a certified financial planner in Boca Raton, Fla., says a money market account at a discount brokerage firm can be ideal for that purpose. Another possibility is a high-yield savings account at an online bank. They’re both currently paying about 4%.

3. Be Aware of Any Tax Implications

Inheritances are generally tax-free to the recipient. However, as Adam points out, that can depend on how the inheritance comes to you. If it’s simply cash, you most likely don’t have to worry about taxes. If you’re the beneficiary of someone’s individual retirement account (IRA), however, you are subject to a different set of tax rules.  

4. Consider Your Options

You may want to earmark the money for a future goal, such as a down payment on a home, your own or a child’s education, or your retirement. Or, you might want to put it to use right away, such as paying down any high-interest credit card debt you’ve been carrying.

If you don’t really need the money for more serious purposes, don’t hesitate to use it for something you’ve always dreamed of but could never afford—a special vacation trip, for example. “Someone felt enough of you to give you this gift,” Adam says. “They wanted you to enjoy it.” 

5. Invest Accordingly

If your plan for the money is to buy a new car a year from now, you will want to invest it more conservatively than if it’s for a long-term goal, such as your retirement in 20, 30, or 40 years. In the former case, you might just leave it in the money market or high-yield savings account; in the latter case, you’ll have more options for potentially higher returns, such as a stock index mutual fund.

The Bottom Line 

If you’ve inherited a little money, what you do with it next is up to you. You can spend it, save it for the time being, or invest it for the long haul. Whatever you end up doing, try to give it some thought before you act because once the money’s gone, it’s gone. And a modest inheritance can go pretty fast.