advice on small inheritance what to do

[Peace Mickey Lovers]

I have recieved some money and not sure what I should do. I have some credit card debt and I could pay it all off and save none of the money. Although I know that I will use the cc again. should I split it in half pay down some of the debt and save the rest? I would appreciat any advice. I do not have much debt only my mtg along with these 2 cc. thanks Lisa

 

[eliza61]

How's your emergancy cash situation? Me, myself (and let me repeat this is me, folks tend to get bent out of shape if I say I dont follow the debt free mantra. LOL)

I use my credit cards. a few years back almost every appliance in my house broke down and had to be replaced. No way was I draining my emergency fund to pay cash. so my comfort zone is I use my cards, rarely do I have long term debt (meaning more than 3 months). for the appliance I got the 6 month 0 interest deals, you get the picture.

So depending on how well padded your savings account is I'd put it there.

 

[bigmamimia]

There are so many variables that you didn't mention. Going from what you said I would put 3/4 of it in savings and put the rest to mortgage (if you have one), next would be any private student loans, third if you don't have the first 2 then put it all toward credit cards paying off the highest interest rate first.

 

[bigmamimia]

If your student loans are federal then don't put any extra money toward them. Federal loan interest is usually quite low.

 

[Peace Mickey Lovers]

I don;t have any student loans the only debt I have is 2 small cc and my mortgage. Thank you for your input.

 

[MomToOne]

There are so many variables that you didn't mention. Going from what you said I would put 3/4 of it in savings and put the rest to mortgage (if you have one), next would be any private student loans, third if you don't have the first 2 then put it all toward credit cards paying off the highest interest rate first.

I find this advice very odd. Why put money towards the mortgage before the credit cards? The mortgage interest rate is going to be much lower, plus you get to write off that interest on your taxes.

I suggest what another PP said - if your emergency fund is weak, put it there. If that's in OK shape, pay off your credit cards.

 

[teCh0010]

I think the dave ramsey model is :

1. Set aside 1000 dollars emergency money
2. Set 401k deduction to whatever company will match
3. Pay off credit card debt
a. in order of highest interest rate
b. smallest to largest (if you need a mental "win" by paying one off
4. Increase you emergency fund to 6 months expenses
4.5 Increase your 401k deduction to max or start a Roth IRA
5. Get term life insurance
6. College savings or Non-tax advantaged investments
7. Pay off mortgage

 

[Pesky]

I agree I would look to what your ER fund is and why you say you will use your CC again. You talk about using your CC again -- which is fine if you are not intending to carry a balance and can pay off in short order. IF this is a "I know I will have to use my CC in the future to pay for necessities because I cannot make ends meet as is", then I would put all the cahs towards your CC debt. Might as well do what you can to keep that debt small.

If that is not the situation, I would look to your ER fund. Do you need some extra there? I would put money in that savings first (maybe half or less, at least $1k) and the rest towards your CC debt.

If you are not going to use your CC to carry balances in the future AND your ER fund is decent, I would do 3 things. (1) put a little extra aside in your ER fund to ensure you have 6-9 mos living expenses; (2) put the largest chunk towards your CC debt and (3) give yourself $50-100 (presuming we are talking about a $5k-7k inheritance; I would keep the amount you take low) for something nice/fun/need.

Per Dave Ramsey, after you have your ER fund, you'd just sacrifice to pay off the CC debt and I have to say, there is nothing like having a zero for your CC debt. So depends on how much you want to sacrifice now to enjoy things later.

 

[bettymae1121]

It depends on A) how much the CC debt is and B) how much the inheritance is, C) how much you curently have in savings, if anything. You don't have to post numbers, but if you paid off the CC's in full, would you have any of it left to save? Do you have savings now, and is that savings what most would consider a fully funded for emergencies (3-6 months expenses or more). If you saved the money and didn't pay down debt, would the inheriantance get you to a 3-6 month savings point? If you don't pay off the CC's and save the money, how long would it take you to pay them off?

I had an inheritance last year, I was able to pay off all CC debt and still had enought to get our savings fully funded, obviously that is the ideal situation. If you don't have enough to do both and without knowing numbers or the rest of your financial picture, I'd lean towards paying off the CC's, put anything left over in savings, and then put what you were paying to the CC's each month into savings to build that up higher. I'd also make sure to have a budget in place to ensure you shouldn't need to go into CC debt again. This means accounting for all future expenses and saving for semi annual or random but expected expenses, like new tires for the car or replacing a broken appliance.

Oh one final note. Be sure to understand any possible taxes you may owe on your inheritance. I owed about $1500 in taxes for my share of the bonds that were sold from the estate I was an heir to. It just made my refund lower so it wasn't an issue for us, but if we hadn't gotten such a large refund (had a baby last year and never adjusted our witholdings) we would have had to write a check this spring to the tax man.

 

[CocaColaGuy]

Send it to me.

 

[Peace Mickey Lovers]

I knew I would get some sound advise from you all. Thank you for all of it , I am going to pay down my debt. and a little left over to savings!

 

[Handbag Lady]

Ah, you should blow all of it in a three-hour shopping spree.


Oh, what YOU should do with not and not what I would do with it...

 

[cfw213]

I find this advice very odd. Why put money towards the mortgage before the credit cards? The mortgage interest rate is going to be much lower, plus you get to write off that interest on your taxes.

I suggest what another PP said - if your emergency fund is weak, put it there. If that's in OK shape, pay off your credit cards.

I agree, why would you ever do this? I'm not a huge Ramsey fan, but I do agree with his "approach" to paying down debt/savings. Your mortgage should be the last thing you pay off, after you've beefed up all your savings and paid down your consumer debt.

 

[MSSANDRA]

Glad you made a decision. You are smart to realize that you at risk of going back to credit cards. We used to be at risk too until we learned how good it feels to be debt free so maybe this feeling will help you to stay away from them too.

 

[nhmommy]

I think the dave ramsey model is :


3. Pay off credit card debt
a. in order of highest interest rate
b. smallest to largest (if you need a mental "win" by paying one off
4. Increase you emergency fund to 6 months expenses
5. Get term life insurance
7. Pay off mortgage

These 4 I agree with completely and do not re accumulate CC debt it just sucks money from you.
Everything you pay off gives you more cash monthly to add to savings. When you pay extra towards your mortgage, although it is a very good long term gain it becomes a short term loss, meaning your mortgage payment doesn't go down and the only way to benefit is by either remortgaging or paying off your house.

 

[bigmamimia]

Yes credit card interest rates are higher than mortgage interest rates. However, mortgage debt is usually a lot higher than credit card debt and the terms of the loan are usually longer. Even with the lower interest rates offered now for mortgages in the end it is still pretty much matched dollar for dollar. A $200,000 is going to cost about $400,000 when all is said and done. A $4000 credit card does not generally end up costing the borrower $8000 after it is all paid off. I guess that it depends on if you are looking for long term or short term satisfaction. Imagine if you put $10,000 toward your mortgage and in 10, 20, 30 years from now you have saved yourself 2 years in payments and $10,000 in interest. I'd go for that deal. Just my opinion though and that is what the OP asked for.

 

[crisi]

Yes credit card interest rates are higher than mortgage interest rates. However, mortgage debt is usually a lot higher than credit card debt and the terms of the loan are usually longer. Even with the lower interest rates offered now for mortgages in the end it is still pretty much matched dollar for dollar. A $200,000 is going to cost about $400,000 when all is said and done. A $4000 credit card does not generally end up costing the borrower $8000 after it is all paid off. I guess that it depends on if you are looking for long term or short term satisfaction. Imagine if you put $10,000 toward your mortgage and in 10, 20, 30 years from now you have saved yourself 2 years in payments and $10,000 in interest. I'd go for that deal. Just my opinion though and that is what the OP asked for.

Since the OP said she intends to continue to use her credit cards, she'll still have that credit card debt 10, 20 or 30 years from now - at a much higher interest rate. Moreover, if she pays down the credit card debt and doesn't use the credit card, she can use the principal she was paying to invest in stock - most of my stock has higher dividends that my mortgage (its the only reason I have a mortgage, because I make a few thousand a year in the delta between investment income and mortgage interest - and our government gives me a tax break for doing it).

 

[Mrs. Ciz]

I am going to go against the grain here...

I say invest the whole inheritance in an account you will not touch. Lock it away for a very long time! Keep paying off you credit cards as you had planned without the inheritance money. Yes, it will cost you more in interest than paying them off now, but I would still do it that way. A large lump sum of money is VERY hard to build and so easy to spend. Most people will make sure they pay their bills, but often, even with the best intentions, will not ever completely pay themselves back (or save money) because things always come up. The mindset often becomes if you don't pay the cc company, you get in trouble, if you don't pay yourself, no big deal.

A lump sum inheritance is one key to building family wealth, the kind that grows through compounding and can be passed on from generation to generation. In addition, I have always had a very hard time justifying spending inheritance money on any non appreciating asset (bills, cars, vacations). Once it's gone, it's gone.

Again...just wanted to give you a totally different perspective.
__________________

 

[momof2gr8kids]

In addition, I have always had a very hard time justifying spending inheritance money on any non appreciating asset (bills, cars, vacations). Once it's gone, it's gone.

Again...just wanted to give you a totally different perspective.
__________________

I'm kind of the opposite. I rec'd about $5000 when my grandmother passed away several years ago. We didn't have any debt then, of course we could have put more in savings, but we spent it on a tent trailer. My grandmother was always about family, and I wanted to put it towards something that would bring us together as a family. I always think of my grandma whenever we are out doing one of our favourite pastimes together, and I will never regret spending it on a non appreciating asset!

 

[vacationer1954]

You should pay off any debt that you cannot deduct the interest and any debt with interest rate over 3.5%. Doing that is the most safe and secure investment there is today.