What should a 24-year-old do with a $500,000 inheritance?

How should a 24-year-old invest a $500,000 inheritance?

By Special to MoneySense on November 12, 2018
Estimated reading time: 4 minutes

Is investing it all in the stock market a good idea? Or should Eric consider a rental property?

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Q: My parents recently passed away and I inherited close to $500,000. I am 24 years old working as an engineer-in-training in Toronto with an annual salary of $65,000. My student loans are paid off and I carry no credit card debt. I currently live off my own salary with about 40% of my after-tax income going towards rent and car payments. I put 8% of my salary towards a company matched RRSP and they match an additional 4%. My TFSA is capped in a mix of ETFs.

My question is: what do I do with $ 500,000? I have looked into mutual funds and ETFs or buying instead of renting while maintaining a safety net since I will never be able to move back in with my parents should things go south. I am unsure what would be considered ‘safe’ yet I know I should start thinking net worth and building on this nest egg.

—Eric

A: I am sorry to hear about your parents, Eric. You’ll find your answer in the lifestyle you want. Let’s walk through a few simple options.

What would happen if you take the $500,000 and invest it all in the markets, leaving it there for the next 30 or 35 years? So each year maximizing your TFSA and, depending on your income, adding to your RRSPs? Your retirement will likely be taken care of. No worries. Everything you earn between now and then can go toward you and your living expenses.

READ: Am I entitled to my dead husband’s inheritance?

Where do you want to live? You can continue to rent, allowing you to invest all of the $500,000. There’s nothing wrong with renting and it has been argued in this book that renting can be more advantageous than owning.

Would you rather live in a house? For a lot of people home ownership is a forced savings plan that’s worked well. Does homeownership fit with your current lifestyle? Do you plan to stay in Toronto? Do you want the work of maintaining a house?

Have you considered a rental property? My daughter just took a year off university to live in St. Johns, Nfld. She’s renting a room from a young engineer. He lives at the house and rents out three rooms to female students. That’s a good lifestyle/wealth building investment if you don’t mind the work and want some company.

One advantage to buying a rental property is the use of leverage, using a loan to help with the purchase. You don’t have to put the full $500,000 against the property, which leaves you some money to invest elsewhere, and you’ll get some tax deductions on the money borrowed.

What if you invested the $500,000 and then a few years later decided to buy a house with a $500,000 mortgage? Would you keep the investments and pay off the mortgage over time, or sell the investments and be mortgage free?

A danger of selling investments and paying off a mortgage is your lifestyle spending increasing, because you no longer have mortgage payments, and you never get back to investing.

The alternative is to pay off the mortgage and then borrow the money back to invest. This way you still have the investments and the loan but your interest payments are now tax deductible.

Are you married, Eric? If so, keep the money in your name. If you’re not married yet, consider getting a prenuptial agreement if you’re lucky enough to find that special someone.

Reading your question, it sounds like you’re good with your money. As long as you put your money toward some form of wealth building activity, buying a home, a rental, or investing, you’re doing the right thing.

The toughest part at age 24 is figuring out what the next stage of your life is going to look like. Give that some thought first and then you’ll know how to use the $500,000. At that point talk to an advisor to fill in the details I’ve glossed over. I wish you all the best, Eric.

Allan Norman is a Certified Financial Planner and Chartered Investment Manager with Aligned Capital Partners. You can reach Allan here: [email protected]

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers investment advisory services and products through ACPI