Don’t fritter away a $170k inheritance, especially on a car

Kylie’s nephew is set for a big payday when he turns 21

QMy nephew is about to receive an inheritance from my father, of about $170,000, when he turns 21. What is your advice for the best way to handle these funds? He would like to buy a good, reliable car and spend a little on some personal items. So, let’s say he’ll have about $150,000. He would like to set himself up the best he can for the future. He is working as a shop assistant in a grocery store at the moment.

That is a well-planned thought by your father, Kylie.

One of the debates in estate planning is what is a “sensible” amount to leave to family members, the idea always being to leave an amount suited to their age and one that gives a boost to their adult life.

I like the broad plan your nephew has in mind. A reliable car as a young adult will be really handy. But as we all know, cars depreciate in value and are expensive to run. If he has not done so already, I would like him to do an annual running costs budget. Add up insurance, car service and maintenance, such as tyres, registration and fuel. My guess is this will come to $3000 or so a year, possibly more if he drives a lot of kilometres. Insurance can be very expensive for younger drivers.

What I don’t want to see is the inheritance slowly being eroded to run the car. Best to think about this upfront.

A few personal items make sense. Then we move to the $150,000. With no firm plan, in my experience, a sum like this, which could help him to buy a home, can be gradually whittled away.

There are two key issues you and he need to look at. The first is time. I have no problem with him investing in a term deposit while he thinks about his longer-term plans. He would earn around 4% in a safe bank term deposit for a year to six months.

The second issue is his attitude to risk. Growth assets are risky but offer higher long-term returns. He really needs to have a timeframe of more than five years to consider growth investments, such as shares. He could easily invest in these through an exchange traded fund. The right answer may be to put some in a term deposit and some in growth investments. This decision, based on time and risk, is personal to each of us.

Sadly, I see the generosity of parents in providing an incredibly valuable lump sum to a young adult completely wasted.

Despite our best intentions, money in our bank account usually gets spent. So, I would encourage something like a term deposit to lock away the money as his plans firm up, or for the longer-term growth, investments should be considered.