Investing

1. Assess and Pay Off Existing Debt

  • High-Interest Debt: If your client has any high-interest debt (credit cards, personal loans, etc.), paying that off first is essential. High-interest rates, typically above 10-15%, can quickly erode wealth.
    • Example: If they have $10,000 in credit card debt at 18% interest, it would cost them $1,800 a year in interest. By paying off this debt, they will save that amount in the long run.
  • Student Loans or Auto Loans: If they have lower-interest debt, such as student loans or auto loans, it’s worth considering whether to pay those off early or continue making regular payments while investing the inheritance. If the interest rate is lower than what they could reasonably expect from investments (say 3-5%), they might focus more on building savings and investments instead of paying these off entirely.

2. Establish an Emergency Fund

  • 3-6 Months of Expenses: After paying off debt, your client should build or reinforce an emergency fund with 3 to 6 months’ worth of living expenses. This provides a financial cushion in case of unexpected events like job loss, medical expenses, or other emergencies.
    • Keep this money in a high-interest savings account (HYSA) or money market account for easy access and moderate growth. Look for accounts with APYs of 4-5% or more.

3. Save for the Future (Retirement and College Savings)

  • Individual Retirement Account (IRA): If your client is employed, a Roth IRA or Traditional IRA is a great way to grow savings tax-efficiently. The annual contribution limit for IRAs is $6,500 (or $7,500 if over 50).
    • Roth IRA: Contributions are made with after-tax dollars, but withdrawals are tax-free in retirement.
    • Traditional IRA: Contributions may be tax-deductible, and earnings grow tax-deferred, though withdrawals in retirement are taxed.
  • 401(k) Contributions: If your client has access to a 401(k) through work, they could consider increasing his contributions. If the employer offers a match, they should take full advantage of it, as it’s essentially free money. The 2024 contribution limit is $23,000 ($30,000 if he’s over 50).
  • 529 Plan for Children’s Education: If their children are young, opening a 529 college savings plan allows the money to grow tax-free when used for educational expenses. Contributions are made with after-tax dollars, but the growth and withdrawals are tax-free if used for qualifying education costs.

4. Invest for Long-Term Growth (Index Funds)

  • Index Funds: For long-term wealth-building, low-cost index funds are a solid choice. Index funds track a specific index like the 500, offering exposure to a broad range of companies with low fees.
    • S&P 500 Index Fund: This is a good option for long-term growth, as it invests in 500 of the largest U.S. companies. Historically, it has averaged around 8-10% annual returns.
    • Total Stock Market Index Fund: This gives exposure to a broader range of companies (large, mid, and small-cap) and can also be a strong choice for diversification.
    • Vanguard or Fidelity Funds are commonly recommended due to their low fees.

5. Set Up a High-Interest Savings Account (HYSAs) for Short-Term Goals

  • For any short-term goals (such as buying a car, vacation, or home improvements), your client should place some of the funds into a high-interest savings account. These accounts allow for easy access while earning interest at a rate much higher than traditional savings accounts.
    • Aim for an account with an APY of 4-5% or higher. Look for no-fee options that offer easy withdrawals.

6. Consider Life Insurance for the Future

  • If your client has a dependent, they might want to think about their own life insurance policy to provide financial protection in the event of their passing. A term life insurance policy is typically the most cost-effective option, providing coverage for a set period (e.g., 20-30 years).

7. Create a Will and Estate Plan

  • Given that they now have significant assets, your client should create a will or update an existing one to ensure that their assets are passed on according to their wishes.
  • Consider setting up trust for children if needed, to manage the inheritance responsibly, especially if they’re a minor.