Ask an Adviser - Should We Use Inheritance To Pay Off Debt Or Invest?

Top answer provided by:

Matt Meehan

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Dear Tracey

Thanks for your question regarding your inheritance and what to do with it.  It is very wise of you to think about the best use of these funds as it is a great opportunity to do things that should improve your financial future.

Firstly, I will assume that your small mortgage ($150k) and outstanding debt of $90k are both personal debts and, as such, you would not be able to claim a tax deduction on the interest and bank fees associated with these debts.  Assuming this, it would be worthwhile using a portion of your inheritance to pay out these debts as you have been making repayments out of after-tax income and you do not receive any income tax benefit.

The next question will be what to do with the remainder of your inheritance. It would be worthwhile for you and your husband to have a think about where you are now and where you would like to be in the future and plan accordingly. Write down your goals and aspirations for the future along with amounts of money required for each goal and aspiration, where relevant. In addition, put a timeframe towards each as well as prioritise.  That said, there is no shame in splurging on things like holidays and travel as life is about experiences not just money!

In addition, you may wish to spend money on your home in order to improve its value in years to come. In fact, you may be thinking about selling sooner rather than later and certain improvements may add value to your home and result in a significantly better price and thus capital gain.  Assuming the property is your principal residence, any capital gain will be capital gains tax free.

Once you have paid off your debts, you might like to consider things such as:

1. Boosting your superannuation,
2. Considering a regular investment plan in lieu of the loan repayments no longer required
3. Using the equity in your home to redraw and commence a geared investment strategy

Let’s look at each in a bit more detail.

1. Boosting Your Superannuation

It would be worth considering when you would like to retire or just wind down from work and work less hours. Have a think about how much money you think you will require in retirement or semi-retirement and this will help you work out how much money you’ll need in superannuation. Once you know where you’d like to get to then you should be able to work backwards and determine whether making a lump sum contribution to superannuation with some of your inheritance money will help you get where you want to be in the future and possibly sooner.  It would be worth talking to a financial adviser as the adviser should be able provide projections based on your situation as well as assumptions relating to the lump sum, ongoing contributions and future investment returns.

2. Regular Investment Plan

Once you have an understanding of your goals and aspirations and how you need to meet them, it may be worthwhile putting money aside and progressively investing in a diversified investment portfolio.  I would recommend talking to a financial adviser and get an understanding of your risk profile as well as the benefits of dollar cost averaging when progressively investing.

3. Geared Investment Strategy

A geared investment strategy is not for everyone as whilst you can magnify your gains using this strategy, you can also magnify your losses considerably. In your case, you could use the equity in home to redraw on your home loan and use the funds for investment purposes.  You will need to take into consider your cashflow and your ability to service the loan.  Whilst the investments may provide an income, it would be worthwhile making sure that you can service the loan without taking this investment income into account. I would strongly recommend talking to a financial adviser and making sure that you are suited to this type of strategy.

As a final note, given you are both in your mid 40’s, it would be worthwhile getting advice regarding your life insurance needs.  You should ensure that you have adequate cover in the event of untimely death, disability, critical illness or severe injury.  It would be a shame for you to have to use up your inheritance and savings just because you didn’t protect yourself with some life insurance cover.

I hope this helps.

Kind regards

Matt

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Article by:

Matt Meehan

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