Some close friends of ours recently came into an inheritance. The grandchildren in this family each received a government savings bond and a share of an IRA, the combined total of which came to about $10,000. While it wasn’t a huge amount of money, it was an amount substantial enough to make some important financial decisions with. I found it interesting to see how some of these grandchildren utilized this money, and their decisions kind of reminded me of the story of the three little pigs. I find them interesting examples of just how an inheritance should and shouldn’t be handled.
The Financial House of Straw
The first of these “little pigs” tends to live in a financial house of straw. Little or no savings, no retirement account, no health insurance, three children to support, and a non-working partner comprise this little pig’s general financial situation. A house of straw is how I would frame this little pig’s financial situation at the moment. One little gust of wind in the form of a injury, major car repair, or similar unforeseen event could blow his financial home down, so the inheritance money could be put to good use.
Sadly, right after the savings bond was received this little pig became worried when he had trouble cashing it since there was a misspelling of his name on the bond. He was concerned because he needed the cash quickly since he’d already spent the money on nonessential stuff. And rather than hold onto the IRA and take the required minimum distributions on it over time in an effort not only to have some financial cushion but to minimize the tax effects of the lump sum payment, this little pig’s portion of the inherited IRA was cashed out in full, the proceeds of which will likely go the same route as the money from the savings bond.
The Financial House of Twigs
The second little pig’s financial situation is a bit better, but it’s far from stable. This little pig used his savings bond to pay off his remaining credit card debt — a good financial move. He was thinking about using the IRA distribution to pay off the remainder of his car loan, which would be another good financial decision. To this point though, that money has instead gone toward things like a massive flatscreen television and hitting the casino. We’ll see if there is anything left over to cover that car loan or even pay the taxes due on the earned savings bond interest when that guest of wind hits this little pig’s financial house of twigs.
The Financial House of Brick and Steel
The third little pig has a much healthier financial situation. There is a retirement plan in place, she carries health insurance, has no debt, and even has an emergency fund of sorts. This little pig took her savings bond, didn’t cash it, but instead stashed it securely away for the future. She did cash her portion of the IRA, but she did so since her earnings this year have been less than normal, which would help lower the tax repercussions on the IRA distribution as well as make up for her lowered income. The proceeds from the IRA went into a savings account in an effort to bolster her emergency savings, strengthening her financial house of brick and steel against potential storms that may hit in the future.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute legal or financial advice. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.