An inheritance is essentially coming into possession of property that is given to you. In most instances, people will think of inheritance as the property their parents leave behind when they die. Over the years, inheritance practices have changed.
The biggest benefit with inheritance money is that it can be used for the same purposes as another large sum of money that you may receive. Some of the common uses are: paying debts, buying a home, investing, meeting day-to-day expenses, and any other purpose as you may deem right.
Buying a house will come to most people’s mind if they already do not have a house. For many people, the inheritance is the only to raise the required 20% down payment for a mortgage. It is always recommended that you don’t take a mortgage of more than 80% of the home’s sale price. Buying a home depending on the school of thought can be a good or bad investment especially if the prevailing real estate market conditions and home prices. In comparison to stock market gains, the investment in a home may not be the better investment decision if the stock market is offering higher returns. On the other hand, one school of thought says that home ownership offers the regular person a forced savings plan though a mortgage and the easiest way to accumulate a few hundred thousand or even a million dollars.
Freeing yourself up from debts is a good step forward since debts such as credit cards attract a high APR which far outpaces the rate of return of any investment you would make. With debt out of the way or better still without debt, you will have excellent investment options. Here is how to invest an inheritance in Canada:
Investing is the best way you can grow a small inheritance into something big that can provide much needed support in retirement and even provide a bigger inheritance for your children. When investing, choose a diversity of investment vehicles since there are many things that could happen leading to disruption of the global economy and affecting stock markets. As such, past performance of stock markets should not be used as a guarantee of any investment decision. These past results should be used as an imperfect predictor of future performance of stock markets and global economy. In line with using past results to predict investment outcomes, $50,000 invested in times of normal growth of the stock market at 7% would be $71,000 in five years, grow to $100,000 in ten years, and become $202,000 in twenty years.
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Take Advantage of Tax Breaks
You need to learn how to invest inheritance money to save taxes to make the most of your new found money. Take this example: That fabulous champagne tower you saw at a party or wedding that is filled by pouring out a bottle of champagne on the topmost glasses that fill up before trickling down to the lower glass and so forth. Your inheritance money will be champagne bottle and the top cups getting filled first will be sheltered accounts or tax-privileged accounts such as a work pension, a Registered Education Savings Plan (RESP) for university savings, a Registered Retirement Savings Plan (RRSP), and Tax-Free Savings Account (TFSA). The Canadian government has designed these special tax-advantaged accounts to encourage citizens to save for retirement and other major expenses such as college tuition. WEALTHinsurance.com has published an interesting article on how to use life insurance as an investment.
Keep Applicable Fees as Low as Possible
When thinking about how to invest inheritance money in Canada, fees are another major consideration to keep in mind. Fees have been termed as investment vampires since they can eat at all the gains you have obtained from your investments if left unchecked. For example, mutual fund management fees (MERs) at about 2 percent may appear to be tiny numbers overall but they may take away about half of your investment gains over the course of 25 years. You must have a singular focus on finding lower fees but still getting top notch financial advice necessary in growing and protecting your investments.
Diversification of your Investments
When investing, the worst that could happen is putting all your eggs in one basket. A disruption of the market can wipe out your entire portfolio overnight.
You must diversify your investments by investing in stocks, bonds and into different sectors. One method used by even seasoned investors is used to exchange-traded funds as a simple and cheap way of diversifying investments into stocks, bonds, real estate, and other emerging markets. The use of low-fee but quality automated investing vehicles to diversify your portfolios will optimize risk and maximize performance.
Seasoned and successful investors will attest that actively managed funds often fail to beat the market on the long term. It is best to have a passive portfolio when choosing stocks to go into mutual funds. The option here is to use ETFs or rather algorithm controlled investment tools that track an index or economic sector which proves to be particularly smart and will offer better results on the long term due to the highly diversified stocks and a low fee to boot.
The Best Time to Invest Inheritance
You have two choices when investing inheritance particularly due to the volatile nature of the stock market. Depending on the prevailing stock market conditions, you may choose to invest all at once or to invest a little at a time generally referred to as dollar cost averaging. Dollar cost averaging provides the opportunity to buy at an average price and to avoid overpaying for a stock that’s about to fall. Investing all at once is considered the superior strategy since one year returns are 12.2% compared to 8.1% for dollar cost averaging. However, the choice is all yours depending on your risk appetite since both strategies are totally valid.