Handling inherited wealth is not as easy as it might seem to you. Although this is a windfall income but more often than not it leaves people in no better financial condition than what they were in before, if not handled with care. While every one might not receive an inheritance, have you thought what approach should you adopt in case you do?

What should you do when you receive an inheritance...?
 

• Don't do anything
  
  Yes, you read it right. It is imperative that you don't take any big decisions immediately after coming in possession of the wealth. Most people would be in an emotional turmoil due to the passing away of their near and dear one. Taking any decisions in that state of mind would not be a prudent thing to do. Moreover, setting a cool down period (say 1 year) will ensure that you don't spend the fortune recklessly on unnecessary things or lend money impulsively to friends and relatives who claim to be in need of financial help, but later might be incapable of repaying your loan. So initially, it will be wise to hold the money in money market instruments or public sector bank savings account or a one-year Fixed Deposit (which provide capital protection and liquidity, although you would derive low real and tax-adjusted returns) until the decision to use it wisely is taken.
   
• Reduce (or eliminate) your debt
  
  Reducing your debt should be amongst your top priorities when you plan to utilise the inherited income. Any financial obligations such as credit card dues, personal loans, business loans etc. should be repaid especially the ones that bear very high interest rates. This will not only lead you to save on a lot of interest payments but also improve your credit rating which is imperative in case you need to obtain further loans in the future.
   
• Boost your contingency reserves
  
  While being optimistic is a good thing, you should be aware that nothing in this world is permanent or guaranteed. It is important to have a contingency or emergency fund. And so, in case if you haven't created an adequate contingency fund, which takes care of at least 6 months – 12 months of your monthly expenses by having deployed money in a separate saving bank account or liquid fund, you must do so with the help of your inherited income. This is necessary as events such as natural calamities or loss of job may impair your ability to earn for a short duration.
   
• Boost your important goals
  
  While you may have many goals such as buying a new car, going for an exotic holiday, purchasing your dream home etc. it is important to prioritize your goals as certain goals are much more important than others. You see, although you might be tempted to use the windfall income for a lot of leisure activities or to improve your standard of living, it is imperative to ensure that you are contributing an adequate amount each month to fulfil the more pressing objectives such as saving for your retirement or building your daughter's education corpus.
   
• Meet your insurance needs
  
  Life in other words means uncertainty. Moreover, with the increasing stress and tension these days a lot of us are prone to physical and mental disorders. It is extremely important to have an adequate life and health insurance cover. Hence in case you are under-insured, then you can use a portion of the inherited funds to increase your insurance cover. However while indemnifying the risk to your life and health, be careful about the policy you buy and make sure that you insure yourself with an optimal risk cover. At PersonalFN we believe in keeping investments and insurance separate, and hence are of the view that term insurance is the best while buying a cover for your life.
   
• Invest the funds wisely
  
  Inflation erodes your income every single day and thus it is imperative that you invest your new found wealth in order to meet your financial goals. But while you do that, be careful of where you are investing and refrain from getting caught in a hype, exuberance or what your friends and family have to say. You must always invest based on your risk appetite and asset allocation. Even though your risk appetite would have increased due to the inherited income, it is necessary to adopt caution while investing. It is imperative to choose your asset classes and instruments wisely. Mutual funds are a good way to invest in equities for those who don't have knowledge about investing in stocks.
   
• Don't ignore taxes
  
  Taxes are an important aspect while managing inherited wealth. It is important to determine how and when the tax liability will arise. You must not ignore your constitutional duty of paying tax. Of course you can use the provisions of the tax laws to save taxes by planning your transactions well, but ensure that you discharge this legal responsibility rightly and consider it as a moral responsibility too.
   

We at PersonalFN know that you may have some personal wishes and it is not wrong to spend a small portion of the income that you have received from the inheritance on your own self. However it is vital to be prudent while spending this windfall income as you would not even realise when a huge portion of the inherited wealth is blown away without really improving your finances.

PersonalFN is of the view that it is important that you sensibly account for the inherited wealth in your financial plan so as to meet your financial goals and live life comfortably. Remember that, using the services of an expert or experienced financial planner for managing your finances will not be a waste of money.

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