Smart ways to manage an inheritance

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. Even if “past performance is no guarantee of future results”, investing in the markets offers the prospect of significantly higher returns than a savings account and the inflation rate, meaning that your capital will retain its purchasing power over time. However, the particularly high inflation since the start of the war in Ukraine suggests that this last statement should be qualified for the time being.

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.

Rental property

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.

Investing in rental property cannot be improvised and it is strongly recommended that you seek advice from experts in the field. This is particularly true in a context of rising interest rates and in a market under pressure such as Luxembourg.

If you have debt charged at higher interest rates, it is worth using an inheritance to tackle it.

Become debt-free

With the particularly low rates of recent years, paying off a home loan didn’t make much financial sense as it was usually possible to invest your capital for a better return. With rates rising again, paying off your debts is once again an option to consider in order to ‘protect’ your finances in the future. 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.