Making the most of an inheritance

Have you seen the RV bumper sticker that says, “We’re spending our kids’ inheritance”? Although I chuckle when I see it, I also cringe a bit, because that attitude doesn’t reflect the guidance Scripture gives on the topic.

The Bible provides important principles when it comes to inheritances. Proverbs 13:22 says, “A good man leaves an inheritance to his children’s children.” On the other hand, Proverbs 20:21 warns that “possessions gained hastily at the outset will in the end not be blessed.” Providing an inheritance is a good thing. However, if you want to increase the likelihood that it will be put to good use, prudence is required.

There are many issues for parents and grandparents to consider when passing on an inheritance. But tough questions also arise for the recipient of such a gift. Should the funds be used to invest and grow for the future, or to pay off debts?

Handling the windfall

One woman recently asked how she and her husband should manage a $70,000 inheritance. One option was to apply it to their mortgage, which would get them close to being completely debt-free. A second possibility was to invest the money to start a new business that the couple had been contemplating. Finally, another option was to invest the funds in a diversified portfolio of stocks, bonds and other investments appropriate for their situation in life.

Although I’m a big fan of being debt-free, it’s also important to weigh the opportunity cost of achieving that goal. If the funds are used to pay down the mortgage, the opportunity cost is that the funds aren’t available to invest for future growth. This couple was within 10 years of retirement, yet hadn’t developed the savings they should have at this stage in their lives to meet their retirement needs. Given these facts, I believe the better decision in this case was to invest the $70,000 rather than prepay their mortgage.

That doesn’t mean I don’t want to see them pay their mortgage off early. But I think that would be better accomplished by downsizing or modifying their lifestyle in other ways and then making prepayments on the mortgage out of current income.

Diversification

What about the idea the couple had about investing the inheritance money in a small business? For many, becoming an entrepreneur is one of the best ways to create wealth, but in this case the risk outweighs the opportunity. The couple is within 10 years of retirement and doesn’t have sufficient capital to recover in the event the business didn’t work out as hoped.

I would also be concerned about a lack of diversification resulting from using the inheritance money to start the small business they were considering. Ecclesiastes 11:2 says, “Make seven or eight portions; you know not what misfortune may come upon the earth.”

Finally, they haven’t run a business before, so it’s difficult to assess their natural gifts for making such an endeavor grow and succeed. The start-up period of a business can be expected to be stressful on both their finances and their relationship.

Receiving an inheritance is a privilege. Although each situation is unique, I generally prefer to see inheritance funds invested and grown so they will be available to meet future responsibilities rather than used to “clean up” previous financial mistakes. God love you.

Phil Lenahan is the president of Veritas Financial Ministries (VeritasFinancialMinistries.com) and the author of “7 Steps to Becoming Financially Free” (OSV, $19.95). Submit questions for columns to askphil@osv.com.