Yahoo Finance Suze Orman Breaks Down 8 Things You Should 'Absolutely Do' With Your Inheritance, Including Retirement Savings
Renowned personal finance expert Suze Orman, host of the "Women & Money" podcast, recently shared several things that she firmly believes people should do if they receive an inheritance. "You have to look at your financial situation and you need to write everything down," she starts out.
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Before doing anything with your inheritance, Orman stresses the importance of understanding your current money, where it's going, and where the inheritance can be most beneficial.
Let's review the eight things Orman says someone should do with their inheritance, and then we'll break each of these down:
Pay off all debts according to the highest interest rate, depending on the size of the inheritance.
Put $1,000-$2,000 into an emergency savings account.
Set aside eight months of expenses in a high-yield or money market "must-pay" savings account.
Put as much as you can toward your retirement accounts for the year until they are maxed out.
Set up a 529 plan for children’s college funds.
Start contributing to a long-term care insurance plan.
Start additional investment accounts for retirement.
If they are still living, take care of your parents.
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Orman says the priority should be eliminating credit card and personal debt. She also suggests paying off your mortgage if the inheritance is substantial and the interest rate is high.
On the topic of debt, Orman describes following Dave Ramsey's debt snowball model of writing everything down and getting rid of the debt with the highest interest rates first — with one exception: "If I inherited money and somebody lent me money that I haven’t been able to pay them back, even if it’s a 0% interest rate, I would pay them back before I did anything else with any of my inheritance."
After paying off all debts, if you still have additional inheritance money, Orman says to put $1,000-$2,000 into an emergency savings account. "Now, I want to make a distinction between an emergency savings account and a must-pay savings account," she states. "An emergency savings account is for true emergencies such as your car breaking down and it’s gonna cost you $400 to fix it up."
According to a recent poll from Bankrate, 27% of Americans don't have any emergency savings. Orman even declares in her podcast that 74% of people aren't able to cover a $400 emergency expense without borrowing money.
Once an emergency savings account is funded, the next thing Orman says to do is save eight months of expenses, more than the typical three to six months most of us are used to hearing about.
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"And after I did that, if there was still money left, I would look at my retirement accounts," Orman says. "And if I still, this year, could fully fund them and put money toward them, I would absolutely do so."
Next, Orman talks about setting up a 529 plan for your children's education, but she emphasizes taking care of your parents first if they are still living. "In fact, right after the debt, the emergency savings, the must-pay savings, and your own retirement accounts, your parents have to come before your kids."
Finally, Orman recommends starting a long-term care insurance plan if you're in your 50s or older. If you still have money left, she suggests investing outside of your retirement account in bonds, ETFs, or individual stocks.
Upon receiving an inheritance or other lump sum, many may want to give money away to help their kids or other family members, but Orman warns against this. As people get older, they have more health care expenses, can’t work as much, and may need that inheritance to survive, particularly as people are living longer. "Please be careful about being overly generous with your children," she states. "The greatest gift your children can give to themselves is the gift of self-independence."
While Suze Orman’s advice provides a strong foundation for managing an inheritance, everyone’s financial situation is unique. Consulting a financial advisor can help tailor these strategies to your needs, ensuring that your inheritance is used most effectively for your long-term financial health.
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