If you receive a sudden windfall, the temptation can be to blow it on a few years of extravagant living – but used wisely it can provide more enduring benefits. You can use it to help you gain financial freedom, offering more choices for your life and career. Here are some ideas on how you can use an inheritance to change your future.
Stock market investment to create an income
Stock market investments can often deliver an income with a long term investment approach. For example, investment in a broad-based MSCI Europe exchange-traded fund could deliver an income of around 2.7%. Even if “past performance is no guarantee of future results”, this is substantially higher than a savings account and, importantly, inflation, which means your capital will retain its purchasing power over time. It is also possible to target a higher income using an equity income fund, where a fund manager will specifically target companies that pay high dividends.
With any stock market investment, you may get some uplift in the portfolio’s capital value if stock markets appreciate. Stock market investments tend to be relatively liquid, meaning you can change your mind and invest elsewhere at any time. Do not ignore, however, the risks associated with such investments.
Another option to create an income is to invest in real estate, though this can be more difficult and time-consuming to buy and sell and inevitably represents a longer-term commitment than a stock market investment. But a rental property, managed efficiently, can generate a long-term income. You will need to do your research on location, demand and potential rental yields, while also being careful in how much you spend on agency fees and upgrades. Repairs can be costly, so it is worth factoring in a fund to handle unexpected expenses.
If you have debt charged at higher interest rates, it is worth using an inheritance to tackle it.
At present debt is extremely cheap. Interest rates are at or close to zero, and home loan interest rates have been less than 2% for an extended period – so paying off a loan no longer makes as much financial sense as when rates were higher. It is usually possible to invest the capital to achieve a higher return. However, it is possible that rates may rise, so paying off debt can future-proof’ your finances. Also, if you have debt charged at higher interest rates, it is worth using an inheritance to tackle it.
Invest in yourself
The Covid-19 pandemic has abruptly highlighted how precarious the employment market can be, but in reality, the world of work has been becoming increasingly insecure over the past three decades and more. In Luxembourg companies are obliged to offer severance pay only to employees of more than five years’ standing, otherwise the law provides only for two months’ notice. An inheritance can be used as a career insurance policy, paying for retraining, to start a secondary job or activity, or to invest in a small business. Even if it doesn’t earn millions, it can offer a useful fall-back position in the event of sudden unemployment.
Save the world
It used to be that if you wanted to do good, you could give money to charity. This may have offered some tax benefits, but you handed over your capital and left it to others to decide how it was used. Today there are ways to do good and keep control over your investments. Impact investing is growing rapidly in popularity as a means to achieve a measurable social or environmental impact while receiving a financial return. Notably, impact investments can make a measurable difference in areas such as climate change, the circular economy or healthcare.
Impact funds often deliver strong financial performance, because responsible companies and activities today benefit from increasing public policy support.
It is not just about doing good – impact funds often deliver strong financial performance, because responsible companies and activities today benefit from increasing public policy support. Equally, there are substantial risks for companies unable or unwilling to manage long-term structural changes effectively.
Indulge a passion
This may not be a route to wealth and should probably represent only a small part of your inheritance spending, but a windfall can allow you to explore a passion for alternative assets, such as art, cars or fine wine. This can be done through a conventional fund – there are now ETFs that track wine indices such as the Liv-ex 100 Fine Wine Index, for example. Alternatively, you can try to build up a collection yourself. Some specialist wine merchants run fine wine marketplaces, allowing individuals both to trade wine and to invest monthly.
Consider using a professional
Used without due thought, it is surprising how quickly an inheritance can evaporate. A financial adviser or discretionary fund manager can ensure that your assets are invested wisely. A financial adviser will manage your basic financial affairs, such as saving for a pension or buying life insurance, while a discretionary fund manager focuses on the investment aspect. They should be able to shape the portfolio to suit your long-term financial goals, such as income, capital growth or provision for educational expenses or a retirement home.
The right way to manage an inheritance is probably not limited to one of these options, but rather a blend of two or more, depending on its size. This means you are not as exposed if one choice fails to perform as expected. Used carefully, an inheritance can be a route to financial freedom. Consider your options carefully and don’t make any sudden decisions.
An inheritance can be used as a career insurance policy, paying for retraining, to start a secondary job or activity or to invest in a small business. Even if it doesn’t earn millions, it can offer a useful fall-back position in the event of sudden unemployment.