What to do with $50k in savings or inheritance?

What should you do with $50k in savings or inheritance?

The smartest thing to do with $50k in savings or inheritance is invest in low-cost index funds. However, you can feel free to spend a little of the money on yourself as long as you are planning for your future. Avoid making any sudden lifestyle changes when receiving an inheritance and allow yourself time to adjust to new wealth.

Imagine, receiving $50,000 in inheritance. Most people either spend the entire amount without a thought while others take time to invest.

$50k in cash can improve your life or fill your home with more stuff.

Luckily for you, I’ll show you the smartest thing to do with your inheritance. I’ll show you how to get the most out of it and if you need to report it to the IRS. You’ll be able to make a decision on how to use your money in no time!

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What is the smartest thing to do with an inheritance?

The smartest thing to do with an inheritance is to invest in a well-diversified fund for the long-term. Investing your windfall today will allow your money to grow and ensure the money isn’t wasted on trivial items. A close second would be to use your inheritance for a down payment on a home or to help pay off outstanding debts or mortgages.

People often spend large inheritances backwards. Most individuals spend their money on things, rather than on assets which can continue to support your lifestyle.

The more money you invest today, the easier it will be for you to reach retirement early

Even if you don’t retire, the more money you have invested the larger your investment returns are. For example, a 10% return on investment of $100k is only $10k annually. However, a $1,000,000 portfolio would generate you $100k with a 10% return on investment.

You can even reach that $1M portfolio faster by investing your lump sum.

For example, let’s assume you’re in your 30s and have $200k invested. Currently, you’re investing $6k per year. At 10% return on investment, you would reach a $1 million portfolio in 15 years.

Now, let’s assume you receive a $200k inheritance. You decide to invest your inheritance instead of spending it. You will now reach your $1 million portfolio in only 9 years.

Deciding what to do with your inheritance can be difficult. Other good financially responsible things you can do is pay off high-interest debt or for home ownership. Do you have a credit card balance, student loans, or are you looking to purchase your first home?

How do I get the most out of my inheritance?

Investing your inheritance is the smartest way to use your inheritance, but you should feel free to enjoy some of it. After receiving a windfall, feel free to spend some of the money on yourself. Avoid making major lifestyle changes such as quitting your job and take time to adjust. People will ask for handouts, but remember, they are not entitled to your inheritance.

Treat yourself to some of the inheritance

Realistically, an inheritance is money you’ve received outside of your normal income streams. There is nothing wrong with using a portion of the money to spend on yourself. The main problem comes when you spend your entire inheritance on stuff rather than financial security.

Remember, personal finance is personal. Nobody can tell you how much of your inheritance to spend on yourself and how much to invest.

Some individuals make one big purchase or ‘splurge’ and then invest the rest. For example, they might get a $200k inheritance, buy a $50k car, and then invest the rest. These individuals are enjoying the money and using ‘money they wouldn’t have normally had’ responsibly by investing.

Personally, I would look at your investments and ask yourself if you are where you want to be financially. Have you planned how much money you need to retire? Let this help you determine how much of your inheritance to spend and how much to invest.

Don’t make any major life changes

People who receive a large inheritance are often quick to make major life changes. Rather than taking time to adjust to new amounts of wealth, they hastily quit their job or sell their home. However, you need to consider any tax implications or additional financial burden.

Making major life changes should involve a plan. You need to map out your finances in your new lifestyle before making a major switch.

For example, let’s assume you receive a large windfall. You quit your job and sell your small home because you just inherited $500k and a large home. 

However, you didn’t consider the cost of property taxes, mortgage and utility payments, or upkeep on the home. You added the $500k to your retirement savings, but the total amount invested can’t support your new expenses.

Homes are one of the biggest traps people fall into when receiving an inheritance. Cars are another trap because people don’t consider insurance and maintenance.

You may have to pay taxes on your inheritance. Speak with a tax accountant to understand your tax burden when receiving any large sum of money.

Most of these problems can be avoided by simply taking some time to adjust to your new wealth. Holding on to your new assets would help you realize that you couldn’t afford a mortgage payment or to retire yet.

Avoid giving unnecessary handouts

Friends, family, and even people you hardly talk to will start asking for handouts. You are not obligated to give away any portion of your inheritance. However, you should make sure your finances are in order before giving away any money.

Invest the remainder of the inheritance

Consider setting your future self up for financial success by investing the remainder of your inheritance. You should have already considered spending some of it on yourself and adjusted to your new level of wealth. At this point, enough time may have passed that anyone requesting a handout has already asked.

What to do with $50k in savings or inheritance?

The best thing to do with $50k in savings or inheritance is to make sure you have a fully funded emergency fund. Open a brokerage account to invest the remainder once the emergency fund contains 6-12 months expenses. Use the remainder of the money to invest in low-cost index funds like VOO or VTI.

Create an emergency fund

Your emergency fund is needed to help you protect against financial emergencies. Consider having 6-12 months expenses on hand in the event you lose your job or have an emergency. Life is going to happen at some point, but your emergency fund is there to protect you.

Open a brokerage account

A brokerage account is the middleman between you and the stock market. You will need a brokerage account like Robinhood if you want to invest. Once your brokerage account is open, you can link a bank account and transfer money to your account.

Invest in low-cost index funds

Low-cost index funds like VOO (Vanguard S&P 500 index) or VTI (Vanguard Total Stock Market index) are usually good choices for new investors. The expense ratio (fees) is minimal when compared to other funds. These funds are well diversified and have a long history of performance.

Do you have to report inheritance money to the IRS?

Money you receive from an inheritance is typically not considered federal income or reported to the IRS. However, future earnings from inherited money, such as investment gains, dividends, or sale of property can be taxed. Each state handles tax on inheritances differently and a tax professional should be consulted.

Summary: What to do with a $50k inheritance or savings

As you can see, the best thing to do with $50k in savings or inheritance is invest your money in low-cost index funds for the long-term. Alternatively, you can pay off high interest debt or use your money to pay towards your mortgage or home down payment.

You have to consider the opportunity cost when dealing with your inheritance. The more money you invest now, the easier it will be to generate income off investments later. Most people buy stuff rather than assets which will continue to pay them.

However, you should consider spending some of your inheritance for yourself. Afterall, it isn’t fun to just invest your money and not enjoy it. Just make sure you don’t make any major life changes and still plan for your future finances.

$50k in savings or inheritance should be used to build yourself an emergency fund. You can then open up a brokerage account and invest the rest.

Inheritance money isn’t considered federal income, but your state may have tax on inheritance. Future earnings from your inheritance can be taxed. You should consult a tax professional or research your state’s tax laws on inheritance.

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.