Wondering what to do with an inheritance? It may be tempting to buy a new car or go to Vegas, but before you rush out to spend it, stop and think it through. Will you look back and have regrets? An inheritance creates the opportunity to pay down debt and invest for the future. Before doing anything rash, take a breath, deposit the cheque in the bank and ask yourself a few questions:
Pay Off Debt or Invest the Money?
Considerations for paying off debt:
- What are the balances owed and the interest rates on my credit cards, loans and mortgage?
- How much money would it take to pay each one or all of them off?
- Do I think interest rates will be going up before I pay them off?
- Will it cost me more to pay the interest charges than what I could possibly earn if I invested the money?
- Will I have greater peace of mind if I paid off some or all of my debts?
Considerations for investing:
- In which, if any, registered accounts do I have room to make a contribution?
- Does my tax rate warrant using an RRSP? Do I think my tax rate today is higher than I expect it will be when I withdraw the money later?
- Do I have any TFSA contribution room? Would I be investing for the long or short term?
- If you have children, is there an opportunity to invest in a RESP and get free Canadian Education Savings Grants (CESG) from the federal government? Are any children still eligible for the grant?
- Does the possibility of a greater potential investment return outweigh the uncertainty of loss?
- How will I invest the money?
- What are the investment costs and expected range of after-tax returns?
- Will the expected average rate of return be higher after fees and tax than the cost of financing my debt?
- What is my stage of life? How much time do I have to pay off my debt or recover from an investment loss?
- Paying off debt is a sure thing; investments don’t always go up.
- What, if any fees or taxes will have to be paid?
- What additional benefits will result: lower debt payments, a tax refund or a Canada Education Savings Grant (CESG)?
Whatever you choose to do (debt repayment, investing or a combination), know that your financial planner will approve. These choices are sound financial planning decisions, which can turn your cash windfall into increased financial security.