Whether it’s a windfall from Grandpa Tom or a small bundle from Aunt Jane, planning what to do with an inheritance should look less like you won the lottery, and more like you’re creating a sound financial future for yourself.

Inheriting money isn’t as far-fetched as it may seem. About 20% of U.S. consumers receive an inheritance at some point in their lives, and the average bequest is reportedly about $180,000. And yet nearly three-quarters of people who are left money will lose it all in just a few years, according to the National Endowment for Financial Education.

“All of a sudden, you have this sum of money and you might think it’s going to last longer than it does,” says Laura Cook, a certified financial planner in Greenville, South Carolina.

With some planning and forethought, you can make sure that little inheritance takes care of you, long after you receive it.

Here are some ideas for nurturing your windfall.

1. Don’t make decisions right away

While keeping your newfound money in a bank account forever is probably not a good idea, sitting tight and coming up with a smart plan is probably a smart place to start.

Cook advises her clients to put their inheritances into a CD for six months to give them time to figure out what they really want from that money.

“It’s going to be safe, it’s going to have a little growth on it,” she says. “It’s not going to be stellar, but it’s going to be protected and it’s going to be protected even from you.”

That means it’s also protected from those family members or old friends who seem to know just when to come out of the woodwork— usually right after the inheritance check clears.

“You might have people who are kind of preying on your situation and, by putting it into a CD where it’s not touchable to you, it gives you an easy out to say ‘I can’t get to that money,” Cook adds.

2. Pay off debts

It’s always a good idea to get rid of your debts, especially any nagging, high-interest or high-balance debt from credit cards or student loans.

“That’s financial goal number one that would give you a lot more financial flexibility in the future,” says R.J. Weiss, a certified financial planner in Geneva, Illinois

And with that debt out of the way—or at least paid down— you can set up good financial habits that will last you a lifetime. Those might include keeping credit card balances low, making on-time payments for all your bills, and making regular deposits into your savings account.

3. Set up an Emergency Fund

An emergency fund, sometimes called a rainy day fund, is different from a vacation fund, or the money you put aside for a house or even a car. It’s money you save specifically for life’s curve balls, such as unexpected medical bills, a sudden car repair, or even a job layoff.

Consider setting aside at least three to six months worth of living expenses into an emergency account, such as a bank account, that will be liquid and easy to access.

“You can never go wrong with saving,” Cook says.

4. How to Invest Inheritance

If you let your inheritance sit in a regular bank bank account, it will lose money over time, because the interest rates for many savings accounts don’t keep track with inflation.

Although all investing involves risk, people typically invest to try to earn more money on their cash than they would by keeping it in a savings account.

Edie Weinstein, a licensed social worker and journalist, invested most of the inheritance she received from her mother back in 2010, after she used some of it to buy a new car.

The bulk of the $90,000 inheritance  is still intact, and she’s had enough to comfortably tap into it over the years for emergencies such as car repairs, medical bills and new gutters on her Dublin, Pennsylvania house.

“I think of it as my cushion and what will help support me later in life,” she says. “I am now 60 and don’t anticipate retiring any time soon.

That’s not to say Weinstein also hasn’t had some fun with that money. She used some of it to contribute to her son’s wedding and a recent trip to Ireland in 2018.

“A lot of people are afraid to throw one chunk of money into the market at one time, especially as we are near a high point in the markets,” Weiss says. “But dollar-cost averaging into the market over one to two years could be a good way to invest the funds.”

5. Get advice

Consider using a certified financial planner, certified public accountant, or some other financial advisor to help you come up with a plan for making your inheritance last.

That could include everything from investing, creating a diversified portfolio, to creating a will, purchasing life insurance, and paying taxes.

In fact, there are three types of taxes to watch out for:

  • A federal estate tax, that is required only when the estate is worth over $11.4 million. The government changes this threshold regularly so check with the IRS if you are expecting a multi-million inheritance.
  • A capital gains tax, which is also a federal tax. Estates are assigned a cost basis, which is the amount of the assets at the time of death, Weiss explained. The capital gains tax is levied if your portion of the inheritance grew, such as a stock or 401(k), in between the time of death and the time you get a check. So if you inherited $10,000 from a loved one’s investment portfolio and it grew to $11,500 between the time they died and the time you got a check, your capital gains tax would be on $1,500.
  • A state inheritance tax. As of 2018, only six states require beneficiaries to pay inheritance tax—Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. But state laws are subject to change, so it’s best to check in with a financial professional just to be sure.

6. Have some fun

Jamie Beth Cohen, a writer and a higher education faculty assistant, has no regrets about how she used the inheritance she received after her father’s death, a life insurance policy she split with other family members.

“We all ended up with amounts in the low six figures, which was huge to me,” Cohen says. “His illness was incredibly stressful for me…so in the immediate aftermath of his death I used some of the money to do things that felt good.”

For Cohen that meant experiences with family and friends that she knew her dad would have loved—a trip to visit relatives in northern Ireland and treating friends to brunch while visiting Colorado.

She then invested the rest, and drew on that investment several years later when she and her husband moved from New York City to Los Angeles in 2007 and needed new cars. Cohen says that if she received an inheritance now, with a mortgage on the Pennsylvania house they moved into in 2010 and two children, she might have been more practical with the entire amount.

“I did feel good that I was spending it in a way that would make my dad happy—traveling, doing things with friends and then buying two safe, reliable, fuel-efficient cars,” she says. “I didn’t feel like I had to spend in a way he would have approved of, but I’m glad I did.”

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Make saving and investing a habit.

Go automatic with Auto-Stash.

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Make saving and investing a habit.

Go automatic with Auto-Stash.

Start now