What should you do when you receive an inheritance?

Receiving an inheritance can be life-changing.

It can also feel surprisingly complicated.

There may be grief attached to it.

There may be family dynamics.

There may be pressure to make the “right” decision.

And if the amount is significant, there can suddenly be a long list of possibilities:

Should I pay off the mortgage?

Should I invest it?

Should I buy a property?

Should I put some into KiwiSaver?

Should I keep it in the bank?

Can I finally spend some of it?

The first thing to know is that you do not necessarily need to make a big decision straight away.

Sometimes the best first move is to do nothing

When a large amount of money arrives unexpectedly, there can be a strong urge to allocate it immediately.

But there is often value in allowing some time before making major financial decisions.

Keep the money somewhere appropriate and accessible while you work out what you actually want it to achieve.

That might not sound exciting, but it can help prevent decisions being made under pressure or emotion.

Because once the money has been spent, invested or committed somewhere, it may be much harder to reverse.

Start with the bigger picture

Before deciding where the inheritance should go, look at the rest of your financial life.

Do you have debt?

How much cash do you already have available?

Are you investing?

Are you on track for retirement?

Do you have any major expenses coming up?

Are there financial goals you have been putting off?

An inheritance should not really be looked at in isolation. It is another piece of your overall financial position.

Paying down debt can make a big difference

For some people, using part of an inheritance to reduce a mortgage or other debt can be a very sensible move.

It can reduce interest costs, improve cashflow and lower financial pressure.

But that does not automatically mean every available dollar should go onto the mortgage. If doing so leaves you with very little accessible cash or nothing invested outside your home, you may want to think more broadly.

The right balance depends on your circumstances and what you are trying to achieve.

Investing may help the money keep working for you

An inheritance can also create an opportunity to invest money that may otherwise have taken years to build up.

But where and how you invest matters.

The right approach will depend on things like your timeframe, how much access you may need to the money, your comfort with market movements and your other investments.

If the money is intended to help fund retirement in 15 or 20 years, the strategy may look very different from money you expect to use in the next two or three years.

You are also allowed to enjoy some of it

This part sometimes gets forgotten. Not every dollar has to be used in the most mathematically efficient way possible.

An inheritance may represent years of saving and hard work by someone you loved. Using part of it for something meaningful can be completely reasonable.

That might be travel.

A family experience.

Home improvements.

Helping children.

Or simply giving yourself a little more freedom.

The key is making that decision deliberately rather than spending first and working out the consequences later.

Be careful with big, irreversible decisions

A sudden increase in wealth can make things that previously felt out of reach seem immediately possible.

A larger house.

An investment property.

A business opportunity.

A major purchase.

Helping family financially.

Some of those decisions may be right for you. But they can also create new costs, commitments and risks.

This is why it is worth stepping back and asking:

What do I want this money to change?

Do you want more security?

Less debt?

More freedom?

A stronger retirement position?

More income?

The ability to help family?

Once that is clear, the financial decisions usually become easier.

An inheritance can change more than your bank balance

Handled well, an inheritance can have a significant long-term impact.

It might bring retirement closer.

It might reduce years from your mortgage.

It might give you the ability to invest more.

Or it might simply create breathing room and greater financial confidence.

But the biggest opportunity is not simply receiving the money. It is making sure you use it in a way that fits the life you actually want.

At Guardian Financial Planning, we help clients work through decisions like these and understand how a lump sum can fit into their wider financial plan.

Because sometimes the most important question isn't:

“What should I do with this inheritance?”

It is:

“What do I want this inheritance to make possible?”