If you came into a serious amount of money, a second opinion is the first step. Today we’re talking about what to do with 500k inheritance.
Generally speaking, the best strategy for $500k inheritance money for those with no debt is to invest 50% of it, spend 10% of it on whatever you like, save 30% of it for potential future costs, and to give away 10%, if that aligns with your values.
The First Step, Just Breathe
You just received a large inheritance, and your first step is to breathe. Seriously. It may seem like $500k is a lot of money, but we can make that amount of money disappear pretty quickly.
Take Alex and Rhoda Toth, who won $13 million in 1990. Thinking they were being smart, they accepted $666,666 payments for a 20 year span. They ended up filing for bankruptcy in 2006 and were eventually charged with tax evasion. And they won $13 million, not $500k.
There are countless stories just like the Toth’s, so keep reading to make sure you don’t have a similar ending to your story. The fact that you are on this page is not a coincidence, you’re smart and do not want to squander your inheritance.
If you get one thing from this blog post, it should be this; do not spend money like you just inherited $500k. This will be reiterated again, but it cannot be stressed enough.
Whether you are a religious person or not, giving money away should be apart of your inheritance plan.
There are many reasons why giving money away is a good idea, and all of them are magnified when you come into a large amount of money like $500k. You may not enjoy reading this section, but at least try to read it with an open mind and heart (maybe not with an open wallet just yet!)
Giving Makes us Feel Better
When we give money away, we actually feel better than spending it on ourselves. Don’t believe me? How about Michael Norton, an esteemed business professor at Harvard Business School.
Michael conducted a study in which students were given either $5 or $20 and asked to either spend it on themselves or give away. So what did Michael and his team find?
They found that those who gave the money away to someone else felt happier than before, while those who spent the money on themselves felt the same.
Another interesting thing to note was that the dollar value did not affect happiness levels. So, when spending more money, both on themselves or on others, there was a similar result. This could mean that breaking up your giving even further could help your happiness, though this has not been scientifically tested, only a hypothesis right now.
This was performed on a micro-scale, but the principle still applies. Giving money makes us feel happier. I’d strongly encourage you to learn more about Michael and some of the other experiments that he ran.
Giving Inspires Gratitude
Gratitude is the core of happiness and self improvement. Do you remember the last time that you helped someone on the street who was really down on their luck? It feels amazing and really puts into perspective just how incredible the lives we live truly are.
When we give, we will continually inspire thoughts of this nature. And when we are grateful, we begin to attract more of what we desire into our lives. So in a roundabout way, giving money away leads to us getting more.
A great example of this is MrBeast. Take a look at his mission and story if you have the time.
You will feel especially grateful when the charity or cause that you are donating to really means something to you. That’s why I always recommend checking out the balance sheets of the charities you are donating to before you donate. If, for every $1 you donate, $0.18 actually goes towards helping the kids in Africa that won’t feel as gratifying.
How to Give With $500k?
There is not necessarily any standard figure I would say is an appropriate amount to give away after receiving a $500k inheritance, but to ballpark it; give $25k-$50k away.
If you are religious, this is widely not considered a tithe, since you did not perform any service in exchange for this money, therefore < 10% is okay.
You should give away, and help others as much as you can, regardless of whether you got an inheritance or not. It will greatly depend on the situation that you are in; kids, debt, etc. will play a role.
Also, remember that you don’t have to give it all away at once; give monthly, quarterly, whatever works for you, just give.
When considering what to do with $500k inheritance money, you cannot ignore the investment aspect. Making a few simple tweaks to the hundreds of lottery winners who went broke, i.e. making a few investments with a fraction of what they won, would’ve drastically changed their outcomes.
There are countless investment vehicles including real estate, stock investing, ETF investing, bonds, and much more. They all vary in risk, and all have their own purpose. Always consult a financial planner when considering investments.
Pick a Good Broker
If you’re planning on investing yourself, then it is crucial to invest with a registered broker with affordable trades.
Our top pick is eToro, because of their world-class support and no-fee trades.
Pay Off Your Debts
Although this is not typically viewed as an “investment”, this is a crucial step in most people’s financial plans.
If you have credit card debt, you may be paying interest on it at 19.99%+ interest rates, you will not find anywhere to park your money that is guaranteed to return at anything near that percentage.
We all want to find the next Tesla or Amazon and invest in it early-stage, but if it were that simple everybody would read a simple blog post and become a billionaire. So, pay off your debts and then you can play around with some of the leftover money to see what you can do.
If you still have a mortgage on your current house, it is also a good idea to pay this off before doing any flashy spending or even investing. As the great Warren Buffett once said;
“If you buy things you do not need, soon you will have to sell things you need.”Warren Buffett
This becomes especially true when you choose to spend frivolously rather than pay off your debts. When you owe nothing, including your mortgage, it is incredibly freeing. It will also make investing easier because you aren’t always thinking about your looming debt.
You can’t talk about what to do with $500k inheritance money without at least mentioning real estate. There are a few options when it comes to real estate investing—REIT’s, rental properties, or buying and holding.
Real Estate Investment Trust
A real estate investment trust will require the least amount of time investment, but can still provide a great source of income. You can think of it as investing in real estate, without needing to come up with an incredibly large down payment or worry about the time investment of owning real estate.
REIT’s can consistently produce an average return of ~10%, so they are an excellent way to diversify your investments and still generate a solid return.
Rental properties are a fantastic option provided that the housing market goes up after you purchase the property. If you can find the right deal, you’ll be making a return on your investment every month, and earning equity in the property by making your mortgage payment.
If you are located in the US, do some digging on Loopnet to search for properties near you, and use this calculator to estimate the kind of returns you could be making. Keep in mind that running a rental property can take a considerable time investment, and you should do further research before making a decision of this nature.
However, if you think there is even a chance that you could fall behind on your mortgage payments, this may not be the right place to put your money.
There are also many options to invest in the stock market, and it is not necessarily as risky as many people seem to think. The S&P500 has averaged returns of nearly 11% in just under the last 100 years.
However, what is risky is trying to catch bottoms and tops of the market. The market goes up and down, and unless you want to become a trader, don’t try to time it. Rather, being an investor will prove more profitable with little to no attention required every month.
One great investment vehicle within the stock market is dividend investing. When companies are doing well, they offer payments to their shareholders in the form of a dividend. When you own shares in companies like these, you’ll earn dividend income at the same time as (often) the value of your shares goes up.
So, you’re making money while it goes up in the form of dividend income, and making money when/if you sell the shares at a profit. Win-win!
You should always consider the fact that stocks and real estate do not always go up. Although picking a random time in history and buying the S&P500 would usually result in a net gain at least within a few years.
There are exceptions, for example; if you bought the S&P500 in 2007 it would have taken you 6 years to even break even. So always consult a finance professional before making any major investment decision.
What’s Not Considered an Investment?
Keep this in mind when considering investment options—you should not consider the purchase of a new car an investment. Buying a car will, over the course of your life, only take money out of your pocket.
When you are wondering where to invest your money, you are thinking about where you will realize the greatest returns. Don’t let you trick yourself into thinking that buying a new Maserati is the best way for you to invest your money. Our brains are very powerful, so we will justify some stupid decisions with even stupider reasons.
Saving some money, no matter where you are at in life will always be crucial. If you’re young, the need for saving is obvious. But even if your kids are already getting older and more independent, it’s a good idea.
Saving money for a college fund for your kid will put them miles ahead of much of their generation, even if it doesn’t cover all of their expenses. The amount that you will put away for your kid’s college fund is entirely up to you, many parents don’t want to give their kids handouts to teach them about hard work.
But, you will want to think about your retirement. How long, if you stopped working today, would you be able to keep up the same lifestyle you’re currently living? It’s an important question and one that will you need to consider when wondering how much of your money you should be setting aside for retirement.
Keep in mind that putting your money in a (nearly) bulletproof investment can also be a good idea, and can almost be synonymous with saving money in a bank account. When you consider inflation, finding an investment vehicle that will be guaranteed to keep your money growing above the inflation rate is another good way to “save” your money.
Here’s the part that some people will get overly excited. Spending your money frivolously. I wanted to include a section on spending your money because enjoying money and what it can do for you is not in and of itself a bad thing. It only becomes a bad thing when we love money, and begin to lose sight of what is good and bad in the realm of money.
But again, spend your money as though you just received $500k, and I promise you that you will be back in nearly the exact same situation as you were before you received the inheritance. Create a financial plan, and stick to it.
Spending is where your creativity needs to take over. What have you been really wanting these last few years? The key is; what have you wanted in your life that you truly believe will add to your life satisfaction or happiness overall?
When you’re considering what to spend your money on, remember that earlier we found that buying a new vehicle is spending money, not investing it. Similarly, if you put a hot tub in your house, you’re spending money. Just because you may or may not get more money for your house in the future, doesn’t make it a great financial decision.
For the purposes of your finances, keep the distinction in mind that investing has the express purpose of eventually putting money in your pocket while spending money takes money out of your pocket.
So, how much should you spend? As a general rule of thumb, you shouldn’t spend more than 10% of your total inheritance wildly, or else you will run the risk of ending up in the same financial spot as you were before the inheritance within a few years.
Also keep in mind what we said about giving earlier, maybe treating your kids or other important people in your life to something that would really add to their lives will feel better than spending the whole sum on yourself.
So Here’s a Rough Idea of What to do With $500k Inheritance Money
To wrap it all up; unless you have debts to take care of—invest $250k, save $150k (could be more or less depending on your saving situation), give $50k, and spend $50k. This article hopefully has given you a bit of insight into how you should deal with each of these keys to inheritance money.
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