Inheritance

[forgop]

Let's say you inherited enough money to eliminate payment of a mortgage, student loans, credit cards, and your car. Do you take that money and pay off those items or do you invest in the market thinking that there are bigger gains to be made in the market while it's down? Your interest rates on the mortgage is 5.75%, student loans are at 4.25%, credit cards at 9.9%, and car is at 6.25%

Obviously, you have considerations in losing out on things like your mortgage and student loan interest, which would be an annual deduction of over $15k. On the other hand, you could significantly increase your pre-tax 401k contribution at work to a much higher level because you can significantly reduce your take home pay.

I'm 34, married, 3 kids that are 5 and under, and see both sides. However, it would relieve a big burden to take away $3k/month away in expenses to go to these items. What do you do?

 

[kittychatalot]

Pay off the debt, and invest the rest, and take what you used to pay in debt and add that to your investments as well!!

 

[PastorsWife]

Been there. I have not inherited but one christmas about 5 years ago got a check, and they haven't stopped coming. I invest it in our investment fund or in the kids' school fund or buy a new car or make home improvements. We live *waaay* below our means, which has allowed me to go back to school (ie quit my job). We save, save, save. We're the kind who get the 15 year mortgage and pay 20% down to avoid PMI.

I asked my relative that has "funded" me several times what to do with the money - pay down the mtg, or DH's student loans. He says NO. Keep it in the investment account. And, since that's how he ended up with so much $$, I do, even though it kills me to know I'm paying interest.

Re-reading your post - you should pay off your CC bill. 4 and 5% are pretty good borrowing rates (you're probably going to make more than 4% on the $ you have invested. 9.9% is a BAD #. Pay that off, even if you have to do it with a HELOC.

Overall, in order to carry the debt in the long term, you need to have a cushion, and you need to be able to forsee crisises.

Let's say you inherited enough money to eliminate payment of a mortgage, student loans, credit cards, and your car. Do you take that money and pay off those items or do you invest in the market thinking that there are bigger gains to be made in the market while it's down? Your interest rates on the mortgage is 5.75%, student loans are at 4.25%, credit cards at 9.9%, and car is at 6.25%

Obviously, you have considerations in losing out on things like your mortgage and student loan interest, which would be an annual deduction of over $15k. On the other hand, you could significantly increase your pre-tax 401k contribution at work to a much higher level because you can significantly reduce your take home pay.

I'm 34, married, 3 kids that are 5 and under, and see both sides. However, it would relieve a big burden to take away $3k/month away in expenses to go to these items. What do you do?

 

[MousekaMaddi]

pay stuff off........!! U will sleep soooooooooooooo much better! Wish I was in your spot!!

 

[solgent]

My father died a few months ago and he did leave me enough to pay our debt which consists only of mortgage (5.75%) and car (no interest). I will pay those off and just as you said, increase my retirement contributions from my salary. I will also contribute more to the 529 college savings accounts I have for our 3 DDs.

I recommend that you control your spending and change your habits so that when your credit card debt is paid off, you don't create it again. Before you consider investing in the market, financial advisors say you should have an emergency fund in case you lose your job or have a serious illness and a "life happens" fund so that you don't have to go into debt when unexpected expenses hit.

 

[Poohbug]

Pay off your credit cards and car. Take the rest of the money and invest wisely. You could then take the money you were paying on CC/car and put them toward the mortgage and student loans if you really want to pay them off.

 

[IDoDis]

My friend is a financial planner and we've had this very discussion before following an inheritance. For your age, and current interest rates on your debt, any good financial planner would tell you to keep the mortgage at the great rate you have which is actually costs you 4.3% if you are in the 25% tax bracket (after your itemized tax deduction).

If you can invest your money and make more than 4.3% in the long run (you are young and have 20+ years before you would need retirement income), you will come out way ahead of the game instead of paying off your mortgage right now.

However, if you only had say 20k left on your mortgage, then you should just go ahead and pay that off because your tax deductions at that point are minimal. Or, if you were say 5 years from retirement but sitting on a 15 more years of your mortgage, then you would want to pay it off sooner.

You should pay off the credit card and car loan and then wisely invest the rest. In 20 years you will come out a lot further ahead.

 

[Chris]

I'd pay off all the debt, MAYBE keep the mortgage but I'd really give it serious thought to get rid of it all.

I sooo wish!!!

 

[bdcp]

Most financial planners will tell you to not pay off the mortgage as that gives you a tax break that is more beneficial to you than not having it. Assuming you can pay all your bills you are better off investing the money long term for your retirement. If you need to pay something like another debt that you can't write off on your taxes, then you might want to do that, but only if it's a hardship to pay it otherwise. You'll end up much better off financially when you really need it versus "feeling good" about having no debt. Feeling good will not support you when you're 70. Most people don't realize you need to replace 100% of your income at retirement. Very few people can drop to 50% of their income when they retire and be able to survive. My DH's company sold last year (Employee owned stock) and we made a 2000% profit over our investment of 7 years earlier. Was it tempting to pay off a few things? Sure, but the tax ramifications were around 50%. We rolled every penny into our current and new funds and 401K's. As a result our retirement is that much closer. Now, it wasn't an inheritance, but it was a bit of a windfall as we didn't expect to make that much. Some people took the money and paid off things or finished basements, etc, and our financial planner actually winced when I told him that. Short sighted is what he said.

 

[AliciaS]

I used to be jealous of friends who inherited money from a father-in-law or grandmother or aunt. Sadly, I stand to inherit about $40,000 once my mom's condo sells. I would give everything we possess to have her back. Everything.

 

[brockscandy]

Interesting post. My husband's grandparents past away a few months ago. He received a letter at the end of May stating he was receiving an inheritance- enough to pay the mortage and then some extra. The next day, his dad called and said don't spend the money before we have it, there is a problem. The lawyers and the trust people didn't communicate with each other. The grandparents died 20 days apart. Must be 30 days for there to be a survivor so funds didn't transfer the way it was planned. There is plenty of money to fund all the inheritances, but it is in the wrong fund so it may all go to charity instead of the children and grandchildren and we are talking MILLIONS. My FIL of course knows all this, but no one has notified the rest of the people named in the inheritance. I wish we were worrying about the same thing you are. Good Luck in your decision.

 

[Goobergal99]

I dream of this often..... I too would pay off the debt, to be debt free would be awesme!

 

[Cheshire Figment]

First is pay off Credit Cards, Car, Student Loans, and the Mortgage (in that order). Then try to put an amount equal to six months of normal living expenses in an emergency fund, such as a Money Market Mutual Fund. Next is max out your annual retirement contributions. Then set up college funds for all the kids. Finally go for other investments.

Since you will no longer have a mortgage, make sure that you keep a special account so you will be able to pay your Property Tax and Homeowner's Insurance when they come due.

With the money you have saved from not having monthly payments you should be able to pay all credit card bills in full in the future.

You may also want to set up a car replacement account. Less than six onths ago I was buying a new car. I had indicated I needed to talk financing with the dealer. Once we got to the best price I pulled out my checkbook and was able to write a check for almost $30,000 in full payment. I think they were not happy since they had figured in some financing kickbacks when they computed the final price.

 

[lisaluvsmickey2000]

7 Baby Steps from Dave Ramsey...a Christian financial advisor. Check out his website for lots of great tips. If you are still confused, find his radio program, buy The Total Money Makeover, or go to his show!
1) $1,000 to start an Emergency Fund
2) Pay off all debt using the Debt Snowball
3) 3 to 6 months of expenses in savings
4) Invest 15% of household income into Roth IRAs and pre-tax retirement
5) College funding for children
6) Pay off home early
7) Build wealth and give! Invest in mutual funds and real estate.

The reason to pay off ALL of your bills is because you can make 10%+ on good growth mutual funds. You said you will be paying off $3K of monthly bills. If you add that up over just 1 year that is $36,000 + the money you will make off investing that much vs. the $15,000 in tax savings.

 

[bdcp]

7 Baby Steps from Dave Ramsey...a Christian financial advisor. Check out his website for lots of great tips. If you are still confused, find his radio program, buy The Total Money Makeover, or go to his show!
1) $1,000 to start an Emergency Fund
2) Pay off all debt using the Debt Snowball
3) 3 to 6 months of expenses in savings
4) Invest 15% of household income into Roth IRAs and pre-tax retirement
5) College funding for children
6) Pay off home early
7) Build wealth and give! Invest in mutual funds and real estate.

The reason to pay off ALL of your bills is because you can make 10%+ on good growth mutual funds. You said you will be paying off $3K of monthly bills. If you add that up over just 1 year that is $36,000 + the money you will make off investing that much vs. the $15,000 in tax savings.

The problem with that $36,000 is most people won't invest it. They'll spend it on something else. Whereas if you automatically invest what you get, it's already done and long term growth will be better on the amount invested initially over what is invested over time. You will have more money by investing it at one time than by spreading out the investment over years. I am a Christian too, but I think Dave Ramsey has flaws in his plans as they are all about being debt free. I think he is short sighted also and forgets the time value of money and growth potential. Also, $1,000 emergency fund is nothing. Why bother? To me that's what a credit card is for. (Emergencies in particular.) Also, a lot of what he tells people to do damages their credit rating. We have debt, but we also have a credit rating of 780.

 

[DVC Sadie]

The best advice any person can give you is to seek out a Certified Financial Planner who can advise you on both short term and long term goals to fit the needs of your family.

Just looking at your post I think that a CFP will tell you to first pay off that credit card debt at 9.9% because the average income for a mutual fund long term is 8% annually (anything over that is a bonus) and then max out 401ks, IRAs for the long term. They may suggest you pay off the student loan and they will probably ask you how much you have in college accounts for your 3 kids.

 

[MrsPete]

Let's say you inherited enough money to eliminate payment of a mortgage, student loans, credit cards, and your car. Do you take that money and pay off those items or do you invest in the market thinking that there are bigger gains to be made in the market while it's down? Your interest rates on the mortgage is 5.75%, student loans are at 4.25%, credit cards at 9.9%, and car is at 6.25%

Obviously, you have considerations in losing out on things like your mortgage and student loan interest, which would be an annual deduction of over $15k. On the other hand, you could significantly increase your pre-tax 401k contribution at work to a much higher level because you can significantly reduce your take home pay.

I'm 34, married, 3 kids that are 5 and under, and see both sides. However, it would relieve a big burden to take away $3k/month away in expenses to go to these items. What do you do?

Pay off the debt as fast as you can! That interest is pretty significant, and it's a "for sure" thing, whereas you might make money on an investment. Once the debt is gone, start investing what you've been paying for these bills every month. It's a win-win situation.

 

[proteus]

Pay off the house, the tax deduction isn't really saving you money, that is a myth. If someone can prove me wrong, please do.

Invest the rest in conservative funds. I have a 401K and put it in the most secure fund, it is the only one with a positive return this year, the others are down 6 to 20 percent. You will always see funds out performing your own at some point, or speculative investments with dizzying returns. However, once you get swept up into these the risk increases and you can just as easily lose a fortune.

 

[Nicsmom]

This has been posted before but I have to say it.

Pay of your mortgage and invest the rest. This way your home is safe and you never have to worry about losing it because you cannot afford it. take the monthly mortgage amount you were paying and use it to reduce the credit cards first as the interest on these will kill you no matter what the rate.

Car last

Car, credit cards and student loans are not something that you "need" (arguably) to live and if you were to go "belly up" they cannot take your home for non payment.

Congratulations and enjoy your peace of mind....

 

[leebee]

My father died unexpectedly when I was 14, the oldest of 4 kids. There was enough insurance to pay the mortgage, and a bit more, so mom paid off the mortgate. In exchange, she kissed goodbye the tax deductions she would have had from it, which made a difference in a couple of years when we were living on her income. Unrecognized by us at the time, she also kissed goodbye any chance we had at college financial aid, as the first thing the granting agencies said she'd need to do, before we'd qualify for grants or loans, was to take a 2nd mortgage on the house- if you cannot show debt, you cannot qualify for funding. We were not living high off the hog, for sure, and all ended up taking loans to pay for college (no way mom's income qualified her for a mortgage!). Now, if you have A LOT of money and are fully funding college funds, that's not a consideration probably. However, paying off the mortgage, while tempting, isn't necessarily what one might want to do first.

If it were me, I'd pay off the credit card debt and the car loans, then pay my mortgage up to 20%, so I could drop the monthly PMI (and maybe get rid of the escrows for taxes and insurance). Oh yeah, and the school loans; 9% interest over 10 years adds up to almost 50% of the original amount borrowed! Then I'd invest the rest, maybe after a trip to you-know-where (akl savannah view!!).

PS- If you cannot figure out what to do with all of it, I just pre-paid heating oil for the winter in Maine, on my credit card! PM me here for where to send the check!! (yes, i'm joking...)