Some options might include paying down debt, building your emergency fund, investing, fund your retirement accounts, funding an HSA and more.
$500,000 is a big inheritance. It could have a significant impact on a person's financial situation, depending on how it is managed and utilized. As you can see here, there are many complex, moving parts involving several financial disciplines.
Saving with a savings account
If your lump sum is a smaller amount or you would prefer to save your money towards certain priorities, a simple savings account might be the better option for you. Cash savings are always popular with people who want to put away a lump sum and earn interest over a long period of time.
Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the FDIC for bank accounts or the NCUA for credit union accounts. Certificates of deposit (CDs) issued by banks and credit unions also carry deposit insurance.
Lump-sum investing means that you take all or a large portion of your investable cash and invest it all at once. A lump sum can be any “large” amount you're willing to invest, from an inheritance to a year-end bonus.
Dave Ramsey, personal finance expert and founder of Ramsey Solutions, says this myth of primarily inherited riches is “flat wrong.” When Ramsey's National Study of Millionaires asked where the riches came from, they found that a whopping 79% didn't receive any inheritance from parents or other family members.
That said, an inheritance of $100,000 or more is generally considered large.
In general, a large inheritance is considered to be a sum of money or assets that is significantly larger than the individual's typical annual income. Specifically, for some individuals, a large inheritance may be considered to be $100,000 or more, while for others, it may be several million dollars.
A Lump Sum investment into a 60/40 (stock/bond) portfolio has the same level of risk as Dollar Cost Averaging into the S&P 500 over 24 months, yet the Lump Sum investment is more likely to outperform!
Cash Loses Value
A good rule of thumb is to keep as little as you think is necessary; while it might seem weird, cash actually loses value over time. “Unlike money in circulation, which loses value over time, money in a bank retains its worth and, on occasion, even climbs in value.
Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills. They keep rolling them over to reinvest them and liquidate them when they need the cash.
A high-net-worth individual is a person with at least $1 million in liquid financial assets.
Generational Wealth Lasts Forever
A staggering 70 percent of wealthy families lose their wealth by the next generation, with 90 percent losing it the generation after that.
How Many Millionaires Inherited Their Wealth? 21% of millionaires received some inheritance, but only 3% received an inheritance of $1 million or above. 79% of millionaires did not receive any inheritance from their family or relatives.
“90% of all millionaires become so through owning real estate.” This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago. Some of the most successful entrepreneurs in the world have built their wealth through real estate.
According to data from Forbes, the United States has the highest number of billionaires in the world with a total of 724 billionaires. This is followed by China with 698 billionaires and India with 237 billionaires. Germany and Russia complete the top five countries with 136 and 117 billionaires respectively.
How old is the average millionaire? The average millionaire is 57 years old. This is because it takes smart financial decisions, hard work, and wise investments to become a millionaire, most of which don't fully pay off until around the age of 50 or 60.
Taking lump sums will affect your future contributions
If you think you might want to top up your pension pot in the future, for instance because you want to keep working part time, then you need to be aware that taking money out in lump sums could affect the amount you can pay in and receive tax relief on.
A lump-sum investment is made at a point in time. The price you pay for the investment(s) may be high or low. If you invest when prices are high, you run the risk of incurring a loss if you need to sell in the near term.
"But given the cost of holding cash for extended periods, most investors—particularly those who don't have significant aversion to loss—should invest a lump sum immediately."