Q&A: We received a cash gift from my wife’s parents. What should we do with it?

QUESTION

We received a cash gift from my wife’s parents. We’re obviously feeling very fortunate to have received anything, but we are a little conflicted over the right way to spend or save it. What should we do?

ANSWER

A cash gift, how nice! I actually see this often with clients whose parents provide annual cash gifts for estate planning purposes. Let’s first remember that regardless of the tax incentives, anyone giving you money deserves to be thanked for their generosity. So let’s start there: phone calls, hugs, kisses from the grandkids, the whole nine yards. Make sure no matter what you do with this money that the people who gave it to you feel appreciated.

Assuming they gifted the money without restrictions on what it can be used for, how do you both perceive the gift? Given what you already know about her parents, their behaviors, and values, are there any unspoken expectations around what that cash should be used for? For instance, would they be upset if you went on a big vacation instead of investing it for the future? Awareness is key and should drive how you map out your spending. 

One other initial point on perceiving the gift. Even though it’s coming from one partner’s parents, I would do everything possible to make sure both of you are involved in decision making around what happens with the money. In other words, treat the gift as collective, if you can. The last thing you want is for this money to create any sort of leveraged influence over your relationship because one partner’s parents are helping and the others cannot. Use it to improve your household and strengthen your family bond; not make things more complicated.

Now, what to do with that cash.

One of the greatest intangible gifts you can receive is the comfort of knowing you can handle an emergency or seize an opportunity without dipping into long-term investments or going into debt. Therefore, you should check your cash reserves first. I believe everyone should strive to have six-to-nine months of living expenses on reserve. If you don’t, use the gift to bulk up your savings or to establish your reserve if you don’t have one yet. Keep this money in a high-yield savings account.  

Once your reserves are topped off, revisit your collective short-term goals. These are things you wish to accomplish over the next four years. In my practice, buying a home or starting a business are typically my clients’ most popular short-term goals. Since you might need money for these goals sooner than later, it’s best to keep cash so you don’t risk losing any principal. There’s simply not enough time to make up for any losses that could occur if you were to invest that money, and any potential gains that could come from investing typically don’t outweigh the impact that potential losses could have.

But if you’ve already met your cash needs all around, you could then consider investing for long-term goals like retirement and college savings for your kids. Deciding which long-term goals to invest in has more to do with your priorities than anything else. If retirement savings are top of mind, think about increasing contributions to your retirement plans. You will shrink your take-home pay, but you’re supplementing that smaller paycheck with the cash gift. This strategy takes some discipline, so make sure your budget is accurate and calculations are correct. As for college savings, I like using 529 plans because of their tax advantages. You can consider making a lump sum contribution to these plans with the gifted money. Depending on the size of the gift, perhaps you do a bit of both.

Unless you’ve met all of your cash reserve goals, short-term goals, and long-term savings goals already, you should be saving more of this gift than you’re spending. But it’s okay to have some fun. Balancing the prep work for your future and living a fulsome life today requires constant reevaluation, but receiving a cash gift is a good chance to do just that. I’ll be concrete about it: if you received a $10,000 gift, I’d never shy away from spending $1,000 of that gift on something you can both enjoy.

There are no limits to what you can do here. But no matter how you slice it, recognize that a gift from your parents to improve your life is a really good thing. Show your appreciation by maximizing it to the fullest.

Send us your questions for the next Q&A: [email protected].

OUR PICKS

Doug’s:

• The Thin Line Between Bold and Reckless - Morgan Housel

• How Couples Can Have Better Conversations About Money - Excess Returns Podcast

Heather’s:

• What if I can’t “savor every moment” of their childhood? - Salon

• Upstate Buyers Are Too Rich for Airbnb Now  – Curbed

WE WANT TO HEAR FROM YOU

Do you have a money question you’d like answered in a future issue? We know you do…

Source call for the book: Does your significant other come from money and you don’t? How does that impact your relationship?

We’re going there. Please email [email protected]. Being anon is okay, but we’d like to speak with both of you!

Are you a brand or business interested in reaching The Joint Account’s audience of 11,000+ subscribers? Email [email protected].

Find us on social: @dougboneparth + @averagejoelle