Inheritance money- How to budget
Hi all,
Sadly, a family member recently passed, and left myself and my siblings an inheritance. I have been thinking about the best way to use this money, and have decided to use most of it to pay off a higher interest home improvement loan we recently took out, and my car loan. My question is this: What is the best way to budget this money? When the money reaches my account, should I budget the entire amount it would take to pay off that loan in that month's budget category for that loan payment? Or is it best to just not budget it at all and just close the loan account out after paying it off? How would this impact my end of year budget report? Any suggestions?
Additionally, I have decided to put the remaining amount in a high interest savings account or CD. How do people fit this into their budget? Does it go in as a tracking account? Should I set it as a category? Do folks have suggestions for a type of CD or Savings that might make the most sense? (The remaining amount would be about $7-10k)
Any other suggestions for managing windfall money into the budget would be appreciated, I have never been in this situation before and my main goal is to use the money wisely and effectively, and to ensure it benefits me in the long run the most, as that is what that family member would have most wanted it used for, not for frivolous spending, but to have an impact on long term plans.
General and specific advice appreciated!
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Categorize as Inflow: To Be Budgeted. The Payee will show up as a line item in the Income/Expense report.
Budget to whatever desired category (categories) in the current month.
The choice to put some into a savings account or CD is a location. It's not a purpose, which is what the budget captures. Do you intend to have that money serve as an emergency or Income Replacement fund? If so, make a category for it. If you want to synchronize an account to a category, that's going to be on you to arrange. It's entirely unnecessary and additional work, which is why it's not recommended practice. See this for more details:
The Relationship Between Your Budget & Your Accounts
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Hi,
I'm sorry about your loss. It's great that you're trying to use your inheritance respectfully.
As dakinemaui mentioned, you're best categorizing it as Inflow: To Be Budgeted.
You could add the loan as a Line of Credit account or Tracking: Liability account. If you use Line of Credit, the debt should show up in your net worth report, and if you use Tracking: Liability, it may show up as an expense. But since you plan to fully pay them off now, you could just as well not include it in your budget at all. The first option may provide a good contrast in your report to see later; the latter will give you a clean slate to start from.
If you put the remaining amount in a savings account or CD, that presumes you want it to be potentially accessible for a near-future time. I personally add my high-yield savings account as an unlinked Budget: Savings account (or you can link it for automatic transaction importing). Then in the budget, I make a category group like "Long Term Savings", and create categories within it like "Unplanned job loss" or "Tax Payments" or "Europe vacation 2021" or "Car Savings". That way, your savings have goals, and you can maintain, use, or add to them with purpose and clarity.
Best of luck!
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Slate Blue Nomad
A follow-up: I'm not sure where you are in your personal finance strategy, but this flowchart can be a useful guide (made for US investors). Putting your $7-10k into high-yield savings or CD will likely apply for the red box (3-6 month emergency fund) or light blue row (large, required purchases).
High-yield savings accounts and CDs have both been experiencing disappointingly lower rates of return lately, but are still a decent way to keep liquid funds in a place where you won't lose 'em. If you feel like you've got your emergency fund and true expenses funded, then it's time to consider investing. Read everything you can and take advice with a grain of salt. Preferences for tax advantages and rates of return will vary depending on what you need your savings to do for you as an individual.
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The Artist Formerly Known As Also want to add: auto loans are often medium to low interest debt. Only you know your circumstances, but investing that amount and keeping the loan sometimes works out better on paper. There are obviously emotional sides of that too - my mortgage is a higher interest than my auto loan, but $1k towards my car is far more emotionally satisfying than $1k towards the behemoth of my mortgage.
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The Artist Formerly Known As where did you find this flowchart? I would love to save a copy for review.
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Mandra B I can't remember, I may have found it on a Mr. Money Mustache forum. I believe if you click the image in this thread, you can right click+save the image. If that doesn't work, perhaps I can direct message it to you.
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The Artist Formerly Known As
I agree with that flow chart, but there are a few things I would change the order of and/or add more splits where they lump things together.
And the advice in the very bottom right gets complicated to manage when you are a YNAB user. -
Superbone thank you!!!
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Inheritance money can have some emotional strings or make you feel a duty to use the funds in a particular way to honour the memory of the person who died. That was my experience at any rate. I was debt-free when it happened in my life, and I thought I would like to invest the funds. But I was also a little worried that I would regret my initial impulse to invest those dollars.
I chose to simply create a temporary category, Dad's final gift, and let it sit in my budget until I was ready to allocate it and comfortable with my decision (about six months later).
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I was in a similar situation a couple of years ago when my mom died. When the money was actually received, I wasn't using YNAB yet so most of it sat in a savings account. Once I decided what to do with it, I moved it to an investment account that I use as a tracking account and it's not included in my budget. It does show up in my net worth though. I left some of the money (about $10,000) in a savings account for emergency purposes and that is in the budget, but the rest I don't plan on touching until I retire.
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Sorry for your loss but glad you can use the gift to improve your finances
I’m wondering about entering the money directly to the category ie. car loan payment instead of as an Inflow: To Be Budgeted. Then you would record the outflow via a transaction
The main argument for this approach as I understand it is to prevent the money showing in income reporting for YNAB which you may or may not want to do.
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I'm so sorry for your loss. This must be a really difficult time for you. I think depending on your current situation you could do this in a variety of different ways. I know a lot of people have been helping their current situation to make themselves feel better during the pandemic (https://seniorfinanceadvisor.com/news/what-to-do-with-unexpected-income-covid-19-stimulus-bill)
Like others have mentioned, I would just add it into a temporary category while not included in your budget.
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nolesrule said:
And the advice in the very bottom right gets complicated to manage when you are a YNAB user.Which part? Using a mix of stocks/bonds for goals further out than 3-5 years? I’m surprised you’d say that since you and I have equities in YNAB.
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Superbone Yes, we do. But I don't think everyone should do that. It's masters level stuff when it comes to using YNAB.
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