As we all know, life is unpredictable and often comes with surprises. Both positive and negative. Such can be a larger sum of money, such as an inheritance.
But how do you think when you get an inheritance? When I myself got a small legacy 12 years ago, I bought a pair of really nice speakers.
Had I instead chosen to put them in a stock or fund savings with an expected average return of seven percent per year, today I would instead have been able to buy two pairs of really nice speakers.
Easy to be hindsight then. I hope that after reading this you will take with you some tips on how you can act if you get an inheritance so that the money will do the most good for you.
So, how do you invest inheritance?
Taking over a sum of money of several hundred thousand is an opportunity and a great responsibility. You can secure yourself, your family and future generations if you choose to invest your money in assets that generate cash flows and increase in value over time.
Perhaps the most important piece of advice in this situation is to take it easy and not be in a hurry.
Keep in mind that it takes a person who saves $500 a month for 50 years to save together $350,000 (without start-up capital and 0% interest on a bank account).
When you understand that the money inherited is about a lifetime of toil and rubbing, you become risk-averse and cautious.
- Less good options: Bank accounts, savings accounts, fixed income funds
- Medium options: Amortize, good funds, buy a villa or condominium
- Best alternative: Buy shares in listed companies, shares in unlisted companies, rental property with housing or premises. Remember that knowledge and work are required to succeed among the best options. It’s not something you throw yourself into.
About bank advisers
Of course, you can have a dialogue with your personal bank adviser.
But remember that bank advisors are sellers, and they will recommend the bank’s own funds which have high fees of 1.5-2.5% per annum.
It does not sound like much, but if you knock out the fees in 10 years and put on no interest-on-interest, you will be sad when you notice how much money you have left on the table.
To live on the money from the inheritance and at the same time keep it?
Suggestions for being able to live on the legacy and at the same time keep it
See your inheritance as an eternal asset to be remunerated. See it as your job to manage the money until the day you have your own children.
Read about how to invest money and what assets are available.
Then build a money machine that gives a return on your capital every year. If you for your $350,000 e.g. buys dividend shares and they give a 5% dividend for the year, your capital base returns $15,000.
You could use this money for consumption, cash investment, education or whatever you want, and the advantage is that you never take away the original inheritance.
What not to do with inherited money:
- Buy bitcoins for the money (not all the money)
- Invest in funds with high fees and poor history
- Buy shares in companies that are not profitable
- Lock in the money in expensive pension solutions
- Lend money to friends or relatives
Savings accounts or fixed income funds are bad
In savings accounts (with a deposit guarantee) or fixed income funds, the savings rate is only 0-1% per year. You have 30% tax on the interest or 30% profit tax on the sale of the fund.
This option is bad because you lose money on your savings. Inflation, which “reduces the value” of money, was 2.4% in July 2017.
The goal for the bank is to keep inflation at 2 percent over time.
This means that your return on your money must at least exceed 2% and preferably a little more as a safety margin.
A savings interest rate of 0.5-1% is therefore not enough if you want to preserve the value of your wealth.
Occasions when savings accounts are good
However, there are times when savings accounts are good. If you do not know what to do with your money then it is a good idea to park money in an account for so long.
Make sure that the account is with a major bank or niche bank and that the account is covered by a government deposit guarantee.
The guarantee reimburses capital and accrued interest up to $95,000 per person and bank.
So you who have inherited $350,000 let’s say, need to spread the amount over to four banks and savings accounts ($350,000 / 4 banks = $75,000). Then you have some room up to 95,000 for the interest that accumulates over the next few years.
Should a bank go bankrupt or go bankrupt, the money in that bank will be locked up.
According to the Debt Office, payment of compensation takes place within 7 days from the day when the deposit guarantee has entered into force.
How long does it take before the deposit guarantee takes effect? I would expect 20-30 days for security reasons, so it can be good to spread the wealth over to even more banks so that dependence decreases if lock-in occurs.
The consequent question will then be how can the Debt Office afford to pay all benefits?
The guarantee is financed through a fee that the banks have to pay every year. The fees are collected in a fund that will be used on the day when a bank with a deposit guarantee collapses.
The guarantee is very much based on trust and there is a risk that the fund will not be enough if several banks go bankrupt at the same time.
Therefore, one could conclude that it is actually safer to save in shares (which are part of a company’s share capital in a balance sheet) than to lend their savings to the banks (which is a debt in the banks’ balance sheet).
Funds or stocks, what should I choose?
If you have the space to let the money work for you on the stock exchange, it is still important that you go through the investments you have inherited on the basis that it should suit you and your life situation.
For most people, mutual funds are a good option.
Through a fund, you hand over the investment to a manager who, according to a predetermined strategy, undertakes to invest your money.
There are different types of management strategies where some are more active and involve exceeding a certain index while others simply overshadow a certain index, so-called index funds.
As the index funds passively follow an index, they also usually have a lower fee than actively managed funds.
There are a variety of funds to choose from, but through the portfolio generator you can calibrate based on both your savings horizon and if you prefer cheaper funds.
This allows you to easily come up with a proposal that suits your circumstances.
Compare this with the funds you have inherited to see how well they match what you need.
Tips if you want to invest the inheritance in shares
While it may be convenient to let a fund manager, for a fee, look up the gold nuggets for you, it can also be fun to design your portfolio exactly the way you want it.
Then a good idea might be to buy shares.
But keep in mind that you thereby also increase the risk in your savings and that it will take some time to find the right balance.
However, there are a number of steps you can follow to avoid stepping on it:
1. Read carefully about the company you are interested in.
By searching for the company’s name and “investor relations”, you will find, among other things, reports and presentations of the company.
There are also a variety of analyzes of listed companies that you can easily take part in through an online search.
2. Choose between 10-15 different companies from 5-6 different industries.
The purpose of this is for you to spread the risks across different industries and perhaps also regions. It can feel overwhelming to get to know so many different companies, but it is an important part of avoiding going to mines.
Also keep in mind that companies can be linked to each other and if you want to spread the risks in an effective way also need to take this into account.
3. Save long-term.
In general, it is better to be exposed to the stock market over time versus to try to spot its ups and downs. It is important to remain calm when the stock market falls sharply.
If you have your loans at a reasonable level and a buffer to stick to when the personal finances storm, there is no reason to sell in a panic.
Sit quietly in the boat and instead take the opportunity to buy a little cheaper.
To invest in both ups and downs
Many ask themselves the question when it is “time” to enter the stock market.
It may even be the case that you do not dare to go in at all as the perception is that a stock market crash lurks around the corner.
Instead, the money is left to fend for itself. In the case of an inheritance, it may be that the money is invested in expensive funds that do not perform or shares that are not profitable.
The solution to this is to divide the money into smaller parts and invest them over time.
Thus, you will invest in both ups and downs and give your money good conditions to grow over time.
Money itself does not qualify you for the game
With money comes problems. When you build money from scratch, you learn to solve problems along the way. But when an inheritance falls on your lap, it can be tough to keep the money.
“A fool and his money will soon go their separate ways” is unfortunately a true statement. It takes knowledge and common sense to manage large sums of money.
The solution is to read everything you can find about stocks and entrepreneurship. In the meantime, start with investments or entrepreneurship in small steps.
Two good must-read books if you are / want to become a millionaire but do not have knowledge of money yet:
- Rich Dad, Poor Dad – Learn to understand that money is a whole subject in itself. Opens your eyes to what is an asset, and what is a debt. Easy to read and a good first book for the beginner.
- One Up on Wall Street – A good start on how to think about stocks and the stock market. If you want to be good at stocks, read everything that has to do with Peter Lynch and Warren Buffett.