Advice on intelligently using/investing an inheritance

[GolfVIDriver]

I am going to try and keep my thoughts succinct while giving you guys a good picture of what's going on.

I sadly lost my Grandmother on Valentines Day. We were very close and I had lived with her through my high school years. She was very much a mother figure to me, and over the last 5 years it was obvious that occasional forgetfulness had progressed through dementia into full blown Alzheimers Disease. The upside is I know she is at peace now.

While I would gladly trade it for more time with her, I did end up with an inheritance. I am not retiring early, but I will say its probably (no exact numbers as it's not final yet) way more money than any of my accounts has ever seen. I do not want to blow this money on anything, and I want to use it to shore up my nest egg and open more financially smart doors for me. Obviously there are tax implications to this, but after all is said and done, I want to invest wisely.

So, here is my situation:
- Married, both of us are 35 years old with stable income just over the 6 figure mark. Shared finances with no surprises.
- No revolving credit card debt
- Both of us have student loans from undergrad - she has $4,000 and I have $32,000ish (don't remember exactly, but thats a close number), both at very low interest rates (3.5% or so)
- We jointly own a townhouse that we are 3 years into ownership on. We paid $204,000, and currently owe around $195,000 at 5.5% interest, 30 year fixed. The house was bought as a new closeout, so no maintenance is on the immediate horizon.
- Two leased cars
- I contribute 6% monthly to my company 401K, which my employer matches .50 cents on the dollar up to that amount. I have about $32,000 in that account, plus another $10,000 in a ROTH IRA from my pension account at a previous job.
- My wife has about $20,000 sitting in an IRA from an old 401K, and contributes $100 a month to a Roth IRA, which she is a little over a year into.
- We put about $1000/mo into savings after bills. I know this is low for now, but.......(see below)
- Savings - we have spent the last two years paying off all revolving credit card debt from my irrational spending in my 20s, and the wedding/honeymoon from last year. We currently have $3500 sitting in the bank, and +$1,000 more added every month.

Our immediate priority is 6 months of living expenses, which this inheritance will more than cover. We estimate that to be around $30,000 to be sitting in a savings account as liquid cash. Longer term, I know both of us are behind on retirement savings. I also know that we might want to try and refi the house to take advantage of the lower interest rates. And finally, what other investments should we consider with the remaining money?

Any financial advise welcome.

[torxim]

First of all, my sincere condolence for your loss.


On the inheritance front, I'm not sure what state you live in but unless the inheritance is over $5m I believe you should be exempt from federal estate tax on the money. Each state varies on their estate tax laws so you may still take a hit.

Regarding what to do with the money, if it is a very hefty sum I'd probably pay off your student loans, your house and any other debt you are paying interest on. If you are planning to have children maybe set up a college fund for each of them that you can contribute to over time and they can know it came from their grandmother.

[GolfVIDriver]

I am in Illinois, Chicagoland specifically. I believe some of her estate accounts are taxable, others are IRAs. Its still being sorted out and this could take months, but that's the bottom line.

I won't be able to pay off the house, and I likely would take most of it up if I paid my student loans off.

I personally feel 6 months of living expenses/emergency fund is probably more important, since the student loans are at 3.X% interest. With the emergency fund shored up, I could take a large portion of my monthly income that would have gone to savings, and put it towards student loans. But again, that money would come out of monthly cash flow and not the inheritance.

[dunhamjr]

Sorry for the loss, I have been there as well.

I agree with torx, pay things off.

-You said no CC debt and with leased cars, it really doesn't make any sense to prepay.
-So I guess I would go for the student loans... since they really don't ever go away. Where as mortgages come and go with the properties that back them.

Starting college funds for your kids or future kids is nice, but the advice I always come back to is 'you cannot get a loan for retirement'.

So if you don't have kids yet...
I would pay down the mortgage instead, maybe even to the point that you could refi from your 5.5% rate to the current 3-4% range. This will allow you to be more flexible with monthly cash flow.

But if you have runts, then yeah its probably a good time to start a college fund with a nice lump of cash to get things going.

[dunhamjr]

I personally feel 6 months of living expenses/emergency fund is probably more important, since the student loans are at 3.X% interest. With the emergency fund shored up, I could take a large portion of my monthly income that would have gone to savings, and put it towards student loans. But again, that money would come out of monthly cash flow and not the inheritance.

Its kind of 6 one way, half dozen the other.

So lets say... you get $30k.

You decide to put it all in savings. So now you can put $1k to edu loans. But you are still paying interest, only 3ish percent... but interest, none the less is being paid on those loans each month.

If you put the inheritance to loans first, than you no longer are wasting/paying that 3ish percent per month. And you can just keep putting $1k in savings each month. Actually probably more since now one or both your edu loans are gone, so you have more free cash to push into savings.

Also by wiping out the loans. You lessen your monthly expenses, so now technically that 6 month number of $30k you had... might turn into $30k lasting 9 months.

[GolfVIDriver]

Good ideas. I hadn't considered paying the SLs off that quick due to the interest rate. However, they are on a 20 year payment plan, which I had planned on cutting down with the extra money we are saving.

The flip side is we really don't have much in liquid savings right now. Now granted with two brand new cars and a new house, I don't forsee any HUGE issues coming down the road, but we do have two dogs with vet bills, etc. Anything could happen.

ANother little wrinkle is my wife is planning on going back to school to complete her bachelors degree starting this summer. We have applied for financial aid, but we haven't been able to get a clear picture (and likely won't for some time) of what that aid is going to be.

Maybe the solution is a compromise...half to SLs, half to savings, and double up the monthlies on the SLs.

One thing I am not hearing a lot of is investments. Interesting.

[dunhamjr]

One thing I am not hearing a lot of is investments. Interesting.

from my side, investments are what you do when you have extra money.
i also think of investing as plain old taxable brokerage type of accounts. which is what you get into once you have no debts, a cash cushion and fully funded retirement.

you have no cc debt. -check

you mentioned putting money into a 401k and two ira's. so you do have a start there, but probably not quite enough being saved to fully cover your retirement. - half a check

and you specifically mentioned you need to build a cash account. - no check

so from my thinking, you are only about half way ready to do non-retirement type investing.

also think of this.
what are you investing for? you have new cars. you have a house. what would be the goal of your investment?

to have more money, sure... but for what? you might determine that your needs and wants really are covered for the short and mid term, so what you really want/need to do is put a lot more into retirement so that you can retire earlier then planned.

[GolfVIDriver]

from my side, investments are what you do when you have extra money.
i also think of investing as plain old taxable brokerage type of accounts. which is what you get into once you have no debts, a cash cushion and fully funded retirement.

you have no cc debt. -check

you mentioned putting money into a 401k and two ira's. so you do have a start there, but probably not quite enough being saved to fully cover your retirement. - half a check

and you specifically mentioned you need to build a cash account. - no check

so from my thinking, you are only about half way ready to do non-retirement type investing.

also think of this.
what are you investing for? you have new cars. you have a house. what would be the goal of your investment?

to have more money, sure... but for what? you might determine that your needs and wants really are covered for the short and mid term, so what you really want/need to do is put a lot more into retirement so that you can retire earlier then planned.

Makes perfect sense to me when you put it that way.

The goal is realistically to raise our standard of living. I want to get back into boating in the semi near future, and we are planning on starting a family ASAP as well as my wife going back to school. Our relatively older age (35) means we are going to have to attempt a family and school at once. Add that into paying off student loans and increasing our retirement accounts, and thats a pretty good idea of what we have in mind. Unfortunately we're about 10 years behind schedule due to me having crushing amounts of revolving credit card debt all through my 20s which we just paid off. There's also this car habit of mine that needs to be fed.....

At some point in the next 5 years I stand a semi-realistic chance of being transferred out to the Bay Area, so that is another consideration as well.

So not as many goals as some other people, but I still try to be ambitious.

[AZGolf]

Also by wiping out the loans. You lessen your monthly expenses, so now technically that 6 month number of $30k you had... might turn into $30k lasting 9 months.

I'm a huge believer in the Dave Ramsey system which revolves around giving priority to paying debt. I'm sole support of family so having savings is absolutely critical, but the OP has dual support, making the 6-month figure overkill if it's based on both of them losing their jobs simultaneously. Unless they work for the same employer the odds are very small of simultaneous unemployment. Being dual income, I would instead do only 3-month savings and put the rest toward paying down the student loans. I'd pick that before I'd touch anything related to housing nowadays.

As far as having kids and how it affects your financial picture - yeah, kids do cost something but my son is almost 13 now and although I can't guarantee this is true for everyone, I don't buy in to any of that "Having kids costs you $685,000!" or whatever made-up number is thrown around nowadays. Based on my experience having kids simply shifts your priorities. I doubt my wife and I would be spending any less if we didn't have a son, we'd just be spending it differently. Your heart leads you to make different choices when you have kids of your own. It's not cost additive so much as a shift in the balance.

[Tinker Toy]

You are receiving plenty of advice on what to do with your inheritance. Whatever you do, don't spend it all paying what you owe as the financial impact will soon vanish. Spend some on a reliable investment that will give you a yearly dividend. My long gone father bought some stock in 1946 that is still good. My mother kept the stock for many years until she passed too. When I get the yearly dividend, I think of my father and then I think: Thank you Daddy! It gives me more pleasure than I can describe.

[GolfVIDriver]

You are receiving plenty of advice on what to do with your inheritance. Whatever you do, don't spend it all paying what you owe as the financial impact will soon vanish. Spend some on a reliable investment that will give you a yearly dividend. My long gone father bought some stock in 1946 that is still good. My mother kept the stock for many years until she passed too. When I get the yearly dividend, I think of my father and then I think: Thank you Daddy! It gives me more pleasure than I can describe.

But if I pay off my student loans, i get $223 a month back. That's a lot more than any investment, last time I checked.

[AZGolf]

But if I pay off my student loans, i get $223 a month back. That's a lot more than any investment, last time I checked.

Indeed. Paying off debt is step #2 on the Dave Ramsey 7-step process and investing doesn't come in until step 4. Paying off house is step 6.

[GolfVIDriver]

Well, I know my student loans are somewhere around $32,000 right now. I don't know what the estate will be, but that will come later.

I think the plan right now is split it 50/50....half on the student loans, half into a money market as an emergency fund.

Subject to change, but so far thats the plan.

[dunhamjr]

I don't buy in to any of that "Having kids costs you $685,000!" or whatever made-up number is thrown around nowadays.

in general i agree. there are family's that can't even make $700k in 20 yrs, much less spend $700k in 20yrs, that end up raising 1, 2, 3 kids.

so while it may not be a physical $685k taken out of your pocket in terms of money actually spent... maybe if they are including opportunity losses from investing money that was spent on raising kids, all of the other normal kid expenses and paying for a kid to go college... then i could see where $685k could be more realistic.

[GolfVIDriver]

in general i agree. there are family's that can't even make $700k in 20 yrs, much less spend $700k in 20yrs, that end up raising 1, 2, 3 kids.

so while it may not be a physical $685k taken out of your pocket in terms of money actually spent... maybe if they are including opportunity losses from investing money that was spent on raising kids, all of the other normal kid expenses and paying for a kid to go college... then i could see where $685k could be more realistic.

TO them I say die old and rich. THe poorer people with kids seem to be happier.

That's my take anyway.

[titleist1976]

I don't agree with much of the advice given here. Hire someone who gets ALL of the information and can make a good plan for you. It's worth it.

[dunhamjr]

I don't agree with much of the advice given here. Hire someone who gets ALL of the information and can make a good plan for you. It's worth it.

i can agree with hiring someone when you get a significant amount... 6-7 figures.

but it kind of sounds like the OP is expecting $30k. not really worth hiring someone to plan.

[titleist1976]

I didn't read that at all. So I'm not assuming which or who is correct.

If it's $30k, it can still be worth it to run your ideas past someone for a fee. The planner won't be offended if there is no business to handle as long as he/she is paid for their time, dependent on the price of the plan obviously.

[Tinker Toy]

But if I pay off my student loans, i get $223 a month back. That's a lot more than any investment, last time I checked.

I said part of the money, not all. The example of what I said about making it so you will be reminded to think of your grandmother in 20 years may still be worth considering.

[X-flow]

I don't think a professional needs to be consulted. The situation is simple. If you have debt, pay it off. With no debt your income becomes your greatest wealth building tool. If you can pay off your current debt, you would most likely be able to cash flow your girls schooling because you will have less expenses every month. Yes, saving money takes a little longer, but the reward is much greater when you are debt free. I know AZGolf agrees...

[titleist1976]

Since there has been no update, I'm going to assume that the OP has gone to Vegas and either won a ton or lost everything. Either way, Dave Ramsey is nothing more than Suze. Both are selling books and making money. You're paying for that advice some way, somehow.

[dunhamjr]

Since there has been no update, I'm going to assume that the OP has gone to Vegas and either won a ton or lost everything. Either way, Dave Ramsey is nothing more than Suze. Both are selling books and making money. You're paying for that advice some way, somehow.

buying a $12 book is a lot different then paying a professional a couple hours billable time to help you figure out how to spend $30k.

for the amount of inheritance, one makes sense. the other not so much.

[titleist1976]

If the OP is going to just net $30k and not have to worry about ANYTHING else, I guess a book might help. But, like someone mentioned, if there is qualified money, real property, etc., getting some good advice is worth a few hundred dollars to me.

[Mister MK4]

Until you get more $$ saved I'd say stash it as part of your emergency fund. Spending it on a financial guy is wasted $ unless you have enough to invest, which you don't.

Or use it to pay some ongoing expenses & max out your 401k contribution. That will essentially convert the $ from taxable to tax-deferred over time, where to others' points it will be invested with the best chance of returning the biggest gains with the least expenses associated with it.

At 3.5% I don't see the advantage of rapidly paying off the student loans but that's just me.