How to Invest Your Inherited Money: Tips and Examples

Receiving an inheritance can be life-changing, but deciding what to do with the money isn’t always straightforward. It may be tempting to invest immediately or make a major purchase. But taking a thoughtful approach can help you avoid costly mistakes and make the inheritance last. Deciding how to invest an inheritance can involve balancing taxes, debt, retirement goals and investment risk. A financial advisor can help you evaluate your options and build a strategy designed to make the most of your inheritance over the long term.

Before You Invest an Inheritance

Receiving an inheritance can be emotionally and financially overwhelming, which can make it tempting to invest the money right away. However, taking time to evaluate your overall financial situation before making investment decisions can help you avoid costly mistakes. A thoughtful plan can ensure the inheritance supports both your immediate needs and long-term financial goals.

Start by determining how much of the inheritance you may need in the near future. If you expect major expenses, such as buying a home, paying college tuition or covering medical costs, it may make sense to keep that portion of the money in cash or other low-risk investments. Setting aside an emergency fund is also a good first step if you don’t already have adequate savings.

Next, review your existing financial priorities. Using some of the inheritance to pay off high-interest debt may provide a return that’s greater than what you might reasonably expect from many investments. You should also consider whether you’re on track with retirement savings and other long-term goals before deciding how much of the inheritance to invest.

Your investment strategy should reflect your time horizon and tolerance for risk rather than the size of the inheritance itself. Someone investing for retirement decades away may be comfortable with a portfolio that emphasizes stocks. Meanwhile, someone planning to use the money within a few years may prioritize capital preservation. Instead of focusing on stocks, they may rely more on bonds, cash equivalents or other lower-risk assets.

Investment Options for Inherited Money

There is no one-size-fits-all way to invest an inheritance. The right choice depends on your financial goals, investment timeline and risk tolerance. Here are some of the most common options to consider:

Retirement accounts: If you’re eligible, using part of the inheritance to maximize annual contributions to an IRA or employer-sponsored retirement plan can provide valuable tax advantages while boosting long-term retirement savings.
Broad-market index funds: Low-cost index funds provide diversified exposure to hundreds or thousands of stocks. This makes them a popular choice for long-term investors seeking growth with relatively low fees.
Exchange-traded funds (ETFs): ETFs offer diversification similar to mutual funds while trading like stocks. They can be used to build a balanced portfolio across U.S. and international stocks, bonds and other asset classes.
Individual stocks: Investing in individual companies may offer higher growth potential but also comes with greater risk. This approach is generally best suited for investors who have the time and experience to research and monitor their holdings.
Bonds: Treasury securities, municipal bonds and corporate bonds can provide income and help reduce overall portfolio volatility. They may be appropriate for investors with shorter time horizons or lower risk tolerance.
High-yield savings accounts or certificates of deposit (CDs): If you expect to use the money within the next few years, keeping it in a high-yield savings account or CD can help preserve principal while earning interest.
Real estate: Some investors use inherited money to purchase rental property or other real estate investments. While real estate can generate income and diversify a portfolio, it also requires ongoing management and carries market risk.

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Common Mistakes to Avoid

One of the biggest mistakes people make after receiving an inheritance is investing the money too quickly without first evaluating their financial goals and immediate cash needs. Taking time to create a plan can help ensure the inheritance is invested in a way that aligns with your time horizon and risk tolerance rather than based on short-term emotions or market headlines.

Another common mistake is failing to diversify. Concentrating a large inheritance in a single stock, sector or investment can expose your portfolio to unnecessary risk. A diversified portfolio that reflects your long-term objectives is generally better positioned to manage market volatility while pursuing steady growth.

It’s also important not to overlook existing financial priorities. If you have high-interest debt or lack an adequate emergency fund, addressing those needs before investing may strengthen your overall financial position.

Finally, if you’re inheriting a substantial sum or have a complex financial situation, working with a financial advisor can help you develop a tax-efficient investment strategy and avoid costly mistakes.

Building an Investment Strategy for the Long Term

Once you’ve addressed your immediate financial priorities, the next step is creating an investment strategy that supports your long-term goals. Rather than making decisions based on the size of your inheritance or short-term market movements, build a portfolio that reflects your investment timeline, risk tolerance and overall financial plan.

Diversification is one of the most effective ways to manage risk. Spreading your inheritance across a mix of asset classes, such as U.S. and international stocks, bonds and cash equivalents, can help reduce the impact of market volatility while positioning your portfolio for long-term growth. Your target allocation should be based on your goals rather than trying to predict which investments will perform best in the near future.

Tax efficiency should also play a role in your investment strategy. Placing tax-inefficient investments in tax-advantaged accounts when possible, holding investments for the long term and paying attention to capital gains distributions can help improve your after-tax returns. If you’re eligible, you may also use some of your inheritance to maximize contributions to retirement accounts or other tax-advantaged savings vehicles.

It’s equally important to maintain your investment strategy over time. Periodically reviewing and rebalancing your portfolio can help keep your asset allocation aligned with your goals as market values change. Avoid making emotional decisions during periods of market volatility. By reacting to short-term fluctuations, you can undermine long-term investment performance.

Bottom Line

A couple going over how to invest their inheritance.

An inheritance can be an opportunity to strengthen your long-term financial future if you approach it with a plan. Before investing, make sure you’ve addressed high-interest debt, built an emergency fund and identified your financial goals. Then, create a diversified, long-term investment strategy that matches your risk tolerance and time horizon. Make sure to then review that strategy periodically as your needs evolve.

Tips on Investing

Every investor is unique. Creating the best strategy depends on who you are as an investor. If you need direction, try speaking with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Most investors should think about ways to prevent loss, and a diversified portfolio is one of the most common methods. By finding the right mix of assets to invest in, you also gain more opportunities for return. Consider using our asset allocation calculator to help you find the best balance of investments for your $40,000.