What to do with an inheritance in your 20s or 30s

NAVIGATING adulthood in your twenties is hard - I speak from experience. There’s a lot of things competing for our attention and money before we settle down - whether that’s treating yourself to the latest fashion trends, travelling the world or getting on the property ladder. It’s all about trying to balance the fine line between enjoying life and thinking about the future.

If you’re lucky enough to inherit some money, property, or other assets from your family, having a plan is integral to making it last and meeting your financial goals.

Unlike a yearly bonus or a pay rise which I dedicate half to ‘responsible’ things (like my savings and investment accounts) and the other half for ‘fun’ things (like holidays and hobbies like painting), receiving an inheritance is a different ball game. And an emotional one too.

That’s because there’s more sentimental value attached to an inheritance. Your family worked hard for it - so it only makes sense to not fritter it away mindlessly - particularly if it’s a large chunk of money.

It may also come with a moral dilemma. You may ask yourself - how can I put this money to good use? Perhaps a grandparent wanted you to be debt-free. Maybe they were keen investors and wanted you to invest in the stock market. Or, it may have come with no strings attached.

Whether it’s a £1,000 or £10,000 - ultimately, it’s your choice. You have free reign to spend, save or even invest. But it all depends on your financial situation.

Introspection is helpful

In your twenties or thirties, you may feel under pressure to do something with the money you’ve inherited but it’s best to take your time.

Have a look at where you’re at and ask yourself these questions:

1. Are you in any debt?
2. Do you have enough saved to cover three to six months’ worth of normal living costs?

If you are in debt - it makes sense to pay this off first.

Alongside this, having a rainy-day fund which ideally should be equivalent to three to six months of your salary is ideal.

Ensuring you tackle debt and having a rainy-day fund means your basic financial needs are met.

If you are looking to invest and need more information, you can learn more about the investing basics here.  Or if you still feel unsure, you can talk to an authorised financial adviser. 

Why should I invest my inheritance?

If your inherited money has been sent straight to your current account - it’s easy to let it just sit there. A savings account or cash ISA means, over time, that the value of your inheritance could go down in value in real terms. This is because the interest you gain needs to beat the rate of inflation - which isn’t easy, especially when inflation is high.

A Stocks and Shares ISA is a popular way of saving and allows your money to work harder for you. It’s really flexible too which means you can dip into it if you need to - something you can’t do with a pension. The goal is to get some returns on your investments - though remember the value of your investments can go down as well as up, so you may get back less than you invest.

It’s also a tax efficient way of preserving your inheritance as any interest earned on cash in an ISA or any income or capital gains from investments in an ISA are generated tax-free. In the 2022/2023 tax year, you can save up to £20,000 in a stocks and shares ISA.

You could also consider investing a lump sum towards your pension.

It’s a good way of ensuring your inheritance is used to its full potential. Since it’s effectively ‘locked in’ it means your money has time to grow. And as you’re younger, you can ride out any short-term volatility. Essentially, time is on your side. But remember you normally won’t be able to access it till you’re at least 57 years old.

Coming across a chunk of money in your twenties or thirties may be somewhat of a rarity but if you’re in this situation, you may now have a clearer idea of what to do with it.

And like a treasured family recipe, you can keep your inheritance preserved and loved for even longer.