Mary Castillo: This is an opportunity to clear debt, keep a safety cushion and set aside a small amount in your mother’s memory

Q: My mother passed away in the spring and I am about to receive a small inheritance of close to $18,000. I have never had that much money all at once. I also have about $12,000 in credit card and line of credit debt. I don’t want to waste this gift, but I am not sure whether to pay off debt, save it or do a bit of both. —Denise

FP Answers: I am very sorry for the loss of your mother. It is also understandable to feel uncertain about money that arrives at such an emotional time. Based on your numbers, the inheritance offers a valuable opportunity to clear the debt, keep a modest safety cushion and, if it feels right, set aside a small amount in your mother’s memory.

But first, give yourself some breathing room. Put the inheritance in a separate high-interest savings account for about 30 days. During that pause, continue making at least the minimum payment on every debt to avoid late fees and protect your payment history. This short delay can help you make a calm decision while keeping the money safe.

When you are ready, list each balance, interest rate and minimum payment. Unless there is a penalty or another concern, pay the highest rate debt first, which is likely the credit card, and then the line of credit. You may need to ask each lender for the current payout amount, make the payments directly and keep confirmation that the balances have been paid in full.

Before clearing the full $12,000, set aside a starter emergency fund of about $1,000 so an unexpected bill is less likely to put you back into debt. Once the balances are paid, automatically direct the same monthly amounts you were paying toward debt into emergency savings.

You would then have about $5,000 left. Keep most of that money available for emergencies or another shorter-term goal. If a small purchase would feel meaningful, choose the amount in advance — perhaps a few hundred dollars — and wait to spend the money until the debt is gone.

Clearing debt may not feel as memorable as a trip or meaningful purchase, but it can make everyday life easier. The money that was going to interest can begin supporting your goals instead. That financial breathing room would be a lasting way to honour your mother’s gift.

Once the balances are at zero, decide how to use the accounts. You might keep one credit card for a small recurring bill paid in full each month, and reduce or close other available credit if it makes overspending more likely. While closing accounts can temporarily impact your credit rating, the effects of overspending are more serious. Keep the remaining inheritance separate from your everyday spending account and give each dollar a job so that the money does not gradually disappear.

If you would find it reassuring to review the plan you make with someone else, a free, confidential appointment with a non-profit credit counsellor can help. The counsellor can review your situation with you, look at your repayment plan and help ensure regular costs do not push you back toward credit.

In Canada, an inheritance is generally not taxable to the beneficiary, although the estate may have tax obligations and interest you earn later may be taxable. If your inheritance includes more than cash, consult a qualified tax professional for guidance.

A perfect plan can take time to make. So pause, protect a small cushion, clear the expensive debt and put a simple system in place to keep the balances from returning. That gives your mother’s gift the best chance to become a genuine fresh start.

Mary Castillo is a Saskatoon-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt since 1996.

Do you have a debt question for FP Answers? Email wealth@postmedia.com.