You may be lucky enough to receive an inheritance, even though it may be tainted by the loss of a loved one.
This money is solely yours to enjoy unless you are married in Community of Property. It will then form part of your joint assets unless the will stipulated that it is to be excluded from the joint estate.
There is also no tax payable on the money that you inherit.
It may be tempting to just blow your windfall on a fancy holiday or a new car – not necessarily the wisest choice. Making decisions around money requires a clear head, and you may not be in the best emotional state following the loss.
If you feel unsure, stick it into a savings account until you can figure things out. Once you are ready, get professional advice from a financial planner or accountant to make sure that you make decisions that are in line with your financial goals.
We generally think of inheritance in terms of cash, but you may also inherit a property.
You then have three choices:
- Live in it yourself
- Rent it out. If you rent it out, you’ll generate extra income for yourself, but this is also taxable and included in your annual income tax return.
- Or sell it. If you decide to sell it, you will generate cash which means further decisions.
Cash in your pocket – what to do?
There are many options, and what you decide to do will depend on your circumstances, financial needs and long term goals:
Boost your emergency fund
Either get it started or give it a good cash injection so that you have around six months’ take-home pay set aside.
It’s OK to splurge a little, just set a limit for this expenditure and stick to it. Don’t buy an item that will be an expense in the long run, such as timeshare.
Pay off expensive debt
The after-tax cost of the debt exceeds the after-tax return on investment, you should use the money to pay off the debt. This may sound confusing, so here’s a calculator that can help you to decide – CLICK HERE
You’ll need to know your debt interest rate, and what return you can expect on your investment, but generally short-term debts such as credit and store cards have high-interest rates, so it’s good to clear them with spare cash.
Investing for tomorrow
How long you want to invest, and how much risk you are comfortable taking are important considerations. There are many investment options, from very low RSA Retail Bonds to high-risk shares, and in between, there are unit trusts, tax-free savings plans, and other avenues for investing. It’s best to seek advice from a professional before jumping in boots and all.
Bricks and mortar
Depending on the amount you inherit, you may want to buy a home, or use it as a deposit. Just be careful of committing yourself to debt that you may not be able to service in the future, and be aware of other extra costs such as rates, maintenance and insurance. If you already own a property, you could consider settling your home loan or doing some home improvements. Being bond free is very liberating – just use the calculator above before making a final decision.
Pay it forward
If you have kids, you could open up investment accounts for them using some of the money, or use it to start an education fund so they can study further one day.
Boost your retirement
You could do a lump sum injection into your retirement annuity and get a tax deduction up to a maximum of 27.5% of your remuneration or taxable income (whichever is higher), but not exceeding R350,000 in any tax year. It’s a great way to benefit your future self and enjoy a tax benefit today.
Make sure you weigh up all the options and make the right decisions for you.
Hasty decisions may leave you empty-handed but a solid game plan will ensure that you reap the benefits of your windfall for many years to come.
This article was written by Sylvia Walker, financial planner, speaker, and author of smartwoman. www.sylviawalker.co.za