Author Topic: Inheritance... pay off tons of debt, invest, both?  (Read 16102 times)

engineerjourney

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Inheritance... pay off tons of debt, invest, both?
« on: September 14, 2013, 06:21:33 AM »
My husband and I are both master degree holding engineers pulling in great salaries around the age of 26.  Along the way we have racked up debt but have never worried about monthly payments because our take home completely covers it and we dont spend a lot otherwise.  (For example we have never had cable and still do not have smartphones).  Now, unfortunately my Grandpa passed away but he left me an inheritance.  I now have $240K sitting in a low interest savings account (yes horrible I know).  I am going to be sitting down with a financial adviser in the next coming weeks (to interview/see if we are on the same page) but I also would like this amazing communities ideas.  We are not fully growing our mustaches but we do have a lot in common, lots of 401K contributions and an HSA are just a part of our paycheck with no thought and we really don't spend a lot of money.  We would rather play board games and drink some wine with friends than go out to a bar (score for us). 

Here is the mountain of debt we have with interest rates:  DH took out a lot of student loans and I have already paid the highest interest ones off, 8-9% ones :(

Principal Balance    Interest Rate   Monthly Payments
$1,470.20                  2.35%   $50.50 (M)
$2,843.38                  6.80%   $38.67 (M)
$4,607.02                  5.75%   $61.25 (M)
$7,174.26                  6.55%   $98.16 (M)
$2,499.29                  5%           $31.92 (M)
$152.13                          5%           $40 (M)
$3,567.56                  5.55%   $52.31 (H)
$3,633.35                  5.55%   $53.27 (H)
$2,482.62                  1.10%   $30.72 (H)
$4,525.27                  5.75%   $87.85 (H)
$1,923.28                  6.55%   
$14,218.86                  6.55%   $197.13 (H)
$8,766.01                  6.55%   $121.53 (H)
$7,185.54                  4.75%   $61.91 (H)
$10,724.42                  6.25%   $82.65 (H)
$17,311.35                  4.75%   $121.08 (H)
$9,259                                        $74 (parents paying with old bonds of his)

(M) are mine, (H) are his.  Some of them have ridiculously low interest rates so I would think investing rather than paying those off would be the smarter decision.  Student loans are also tax deductible (which I know doesn't mean much but may help prioritize the payoff).   Which ones should we pay off/which should be leave?

We also both bought brand new spanking cars... totally against the mustache way, I know.  We looked for used cars and failed especially when it came to the truck (all beaters/not taken care of) and we were able to get it under invoice because of a relative working at ford so we did the math where we didnt have to pay for the depreciate right away.  We will run these vehicles into the ground so consider it worth the money... but of course we put them on a loan.... Yes the truck is used as a truck a lot but we drive the smaller one to save money and carpool. 

                           Principal Balance   Interest Rate   Monthly Payments
2011 Hyundai Elantra:  $8,997.00              5.25%              $232
2013 Ford F-150           $18,764.00      3.09%              $400
 
The last twist to this story of 'affordable' debt is that we have a mortgage.  I saved up money since high school for a house.  I love it, best purchase ever made.  BUT we put 5% down and have PMI.  APR of 4.75%.  To get rid of the PMI ($148/month) we would have to throw around $33,000 at the mortgage (would also reduce payoff time and interest as you all know).   BUT Bank of America holds our loan and they SUCK so we are not sure if they will actually remove the PMI since I have seen stories of them not doing so.  (Would try to get something in writing from them before spending the money?).

So after all that information.   Do you all have suggestions?  What to pay off, what to invest?  We have $240,000 to play with.  If we get monthly payments of debt down we will not be spending it, it would allow me to get to my level of saving once again.  If invest, give something to start with.  I have read a LOT over the last week on this site, seems like I should get a Vanguard account with some index funds? 

THANK YOU if you made it this far.  You all rock!


StinkWorth

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #1 on: September 14, 2013, 06:53:47 AM »
Quote
I am going to be sitting down with a financial adviser in the next coming weeks

There are different types of financial advisors.  If they get paid commission for selling investment or insurance products, they have a conflict of interest and you will have a bad experience.

If they are fee-for-service, then you will be slightly better off.

However, you probably don't need a financial advisor, because your loans are larger than the inheritance.  So, the easy and correct advice is: use the 240k to reduce the loan amounts and interest repayments.

:

For the student loans, pay them all off.  Except maybe the 2.35%, 1.1%, and $9259(0% ?) loans.  Those interest rates are lower than your home loan, so you will me mathematically better off by not paying them, and paying the home loan instead.  However, there is an emotional benefit and reduced stress when paying off a loan.

As for investments, paying the home loan is 4.75% tax-free return, which equates to a 6.8% risk-free return (assuming 30% tax rate(?)), which is pretty damn good.

I'm not sure about the T&C of your PMI and home loan, but you should be able to get a better rate by shopping around and avoiding PMI.  Watch out for exit fees.

You do not need to have any investments at the moment.  However, if your risk appetite is high, you may wish to withdraw some money out of the home loan (after avoiding PMI) to buy a leveraged investment property or shares.

:

Your two cars are too new and too expensive.  That is a huge black hole.  The solution is to sell both, and buy one 5-7 year old fuel efficient car for $5000 cash.  Use a box trailer instead of a F150.

You have a negative networth at the moment, but if you focus on your budget, soon you can be becak to zero, which is a great milestone.

Another Reader

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #2 on: September 14, 2013, 07:10:48 AM »
What is all this debt?  Can you label which are student loans, which are credit cards, etc.?

My initial reaction is that I would probably pay off all the debt and start over.  Certainly anything with an interest rate of 5 percent or over.  However, I don't see any understanding of money and debt here.  I'm not convinced you won't go out and rack up a bunch more debt because you can afford the payments on your salaries.  How much savings do you have other than the $240,000?  Are you both maxing out your retirement plans at work?  Do you have IRA's?  If not, I think you need to do a budget and set some financial goals before you do anything else.

Who is the "financial advisor"  and what company does this person represent?  Financial advisors are not necessarily acting in your interest.  Many are salespeople, not advisors.  They do not have a fiduciary duty to you.  If you spend the time to educate yourself, you can do as well or better without the added cost of an "advisor."

To sum up, post all of your income and expenses, how much is going to savings and retirement, and all the assets and liabilities, including the house.  You will get suggestions on what to do.  And sit down with the spouse and do a budget.  I think you will be surprised where the money you earn has been going.  You will be much better off when you are in control of your money.

seattlecyclone

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #3 on: September 14, 2013, 08:53:01 AM »
My advice for what to do with the cash is pretty simple. In order:
1) Pay off all the student/car loans with a higher interest rate than the mortgage.
2) Pay down the mortgage enough to get rid of PMI. At this point you should also look into whether refinancing to a 15-year mortgage would bring the interest rate down. If you can't easily afford the payments on a 15-year mortgage with your salaries, your house is too big.
3) Pay off the rest of the loans, highest interest rate first.

That's what I would do with the inheritance. As to long-term planning, I do agree with the suggestion Another Reader had to post your income and expenses. You'll get some pretty good suggestions on how to bring your expenses down and your time to retirement will go down with it.

NV Teacher

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #4 on: September 14, 2013, 09:03:05 AM »
My first reaction is that you have a lot of debt.  I have two, a student loan and a mortgage and that is too much for me.  I'd say take grandpa's money and pay off everything that you can and start over.  Imagine how it would feel to take the amount you are sending out each month to make all those payments and watch your investments or savings grow. 

Daleth

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #5 on: September 14, 2013, 10:08:36 AM »
Dude, you're only 26 and you have well over $100k in debt! I would pay off everything that's at over 5%, including the Hyundai, and strongly consider selling the Ford. I only say "strongly consider" instead of "definitely" because I don't know what you mean by "the truck is used as a truck a lot." Does either of you use it to earn money? Do you... have a contracting business or something?! Do you hunt every weekend and then haul around the carcasses of deer or caribou?!?! I have trouble understanding how two full-time engineers would have the need to "use the truck as a truck" (i.e. to carry large heavy loads) on anything like a frequent basis.

And if you do the math, let's say you somehow actually NEED a truck once or twice a month--you will save SO MUCH money by just doing this: (1) Sell truck, replace with $5000 good used car (assuming you commute separately on commutes that require cars, i.e. you actually do need two cars--otherwise don't replace it, just get a bike or join Zipcar or something); and then (2) when you actually DO need a truck, either borrow one and "pay" your friend/relative with pizza and beer, or head over to U-Haul or whoever and rent one. The rent/borrow approach will not cost you even remotely close to $400/mo (PLUS insurance!) and selling the truck, even to replace it with a $5000 car, will net you an immediate big pile of cash.

Once all that's done, personally I would sock away 6 months of expenses in an emergency fund, max out both your 401k's and then go hogwild in the real estate market--you should still have $90k-ish of your inheritance left at this point--and see what I could find in the way of sweet little rental properties. You will qualify for loans to get rentals much more easily because with so much debt paid off, you'll have a much better debt-to-income ratio. But that's just me; if you're not into rental real estate you'll need to find some other investment. But in any case, invest the rest.

OzzieandHarriet

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #6 on: September 14, 2013, 10:58:27 AM »
I didn't get out my calculator and add this all up, but with $240k, can't you pay all of it off + refinance your mortgage, putting 20% down to avoid PMI? Rates are still pretty low.

That's what I'd do, anyway.

Daleth

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #7 on: September 14, 2013, 11:03:58 AM »
I didn't get out my calculator and add this all up, but with $240k, can't you pay all of it off + refinance your mortgage, putting 20% down to avoid PMI? Rates are still pretty low.

That's what I'd do, anyway.

Oh right, I missed that. Kill the PMI ASAP!

Kira

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #8 on: September 14, 2013, 11:35:59 AM »
I agree with the plan of paying off all higher rate debt, paying enough to the mortgage to get rid of PMI, and then investing the rest. Don't forget you should also invest the money you're now saving! If you are interested in real estate I would go for it. Getting such a great head start so early in your career is going to pay off BIG if you keep your cost of living low and don't spend more once you have fewer bills.

I am boggled that you are even keeping track of that many separate debt payments and haven't missed any!

Catbert

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #9 on: September 14, 2013, 11:38:26 AM »
Be aware that the inheritance is your "separate property" as long as it is kept separate.  Once used to pay his debts or intermingled with joint money it becomes community property.  At least that's how it works in California, a community property state.  This may not matter to you, but I notice that you labeled the student loans as "his" and "hers" so maybe you keep finances at least partly separate so I thought I should mention it.


Villanelle

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #10 on: September 14, 2013, 12:13:21 PM »
Jesus. That's a lot of debt, and it's crazy that you justify it to yourself by saying you can afford the monthly payments.

I'd pay off every bit of it, assuming your marriage is stable and you have joint. finances.  A case could be made for keeping those debts with really low interest rates, but I'd get rid of it all, and refi and ditch the PMI. 

MelodysMustache

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #11 on: September 14, 2013, 12:46:38 PM »
Be aware that the inheritance is your "separate property" as long as it is kept separate.  Once used to pay his debts or intermingled with joint money it becomes community property.  At least that's how it works in California, a community property state.  This may not matter to you, but I notice that you labeled the student loans as "his" and "hers" so maybe you keep finances at least partly separate so I thought I should mention it.

This is really important.  Keep the inheritance as your separate property. 

IMHO you should pay off your loans and put the rest into an investment account in your name only.

Dee18

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #12 on: September 14, 2013, 01:50:29 PM »
I hope you and your husband stay married forever, but you never know... Check on your state law.  A friend of my learned the hard way that the inheritance from her mother that she used to pay for most of their house (purchased jointly with husband) did not give her the right to keep the house in the divorce.  You might want to keep at least part of this in a separate investment, and document that.

lbdance

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #13 on: September 14, 2013, 02:28:08 PM »
Jesus. That's a lot of debt, and it's crazy that you justify it to yourself by saying you can afford the monthly payments.

I'd pay off every bit of it, assuming your marriage is stable and you have joint. finances.  A case could be made for keeping those debts with really low interest rates, but I'd get rid of it all, and refi and ditch the PMI.
+1 to this.

If I was thinking about it selfishly, the first thing I would do with any inheritance is pay off "my" debt. By my calculations you only have ~20k of student loans. Paying this off barely make a dent in your inheritance. Secondly I would get rid of the PMI. (Assuming that I have understood correctly what this is)

More information is required as to how you run your day to day finances before I would go any further. Joint finances, and both being on the same page in terms of FI would determine what happened next. Has your husband made any suggestions as to what could be done with the money?

marty998

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #14 on: September 14, 2013, 06:10:18 PM »
I am going to go against the grain here.

If you use that inheritance to pay off the debt you are not going to learn any lessons from this.

You are never going to understand the pain and suffering involved in working your arse off to pay for the consequences of your decisions.

I'm betting that old habits will reform and 10 years down the track you will possibly end up with another mountain of debt. But this time, there's not going to be an inheritance.

So my advice is to invest the Grandpa's money. F'ck the financial adviser, who will strip upfront and trailing commissions from you for the rest of your life, and just buy index funds, 30% fixed interest, 40% equities, 20% international equities and leave 10% in cash for opportunities.

Pay off your debts with your own blood sweat and tears. Guarantee you will never dig yourself another hole if you know the pain of getting out of it.

lhamo

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #15 on: September 14, 2013, 06:17:37 PM »
Other than the separate property issue, I don't see why there is any question about what to do -- basically pay off all the student loan and car debt, plus a sum sufficient to bring you under PMI levels,  and you will still have plenty of money to invest.

Roughly $102k in student loan debt
Roughly $28k in car loans
Roughly $33k to mortgage -- I would throw 50k or so at this to be sure you don't get BoA quibbling about whether or not you are under the level that requires PMI

That would be about $180k, leaving you with a nice cushion of $60k to invest/use as an emergency fund.

Yes, some of your current loans are at low rates, but other than the car loan they are not really enough to make much of a difference if you invested that money elsewhere.  In my book it would be better to pay off the loans, have a clean slate and not have to worry about monthly payments, etc. Then you have more time/mental energy to focus on your investments.

Obviously you both should be maxing out all available retirement options.

Wonderful that your gramps could do this for you.

engineerjourney

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #16 on: September 14, 2013, 10:37:08 PM »
Other than the separate property issue, I don't see why there is any question about what to do -- basically pay off all the student loan and car debt, plus a sum sufficient to bring you under PMI levels,  and you will still have plenty of money to invest.

Thank you.  Thats what I was thinking.  Just wanted to pass it by others that seem to have their shit together. 

I have NEVER had credit card debt.  I only have credit cards for the rewards points and pay in full every month, my husband does the same.  I am sorry it wasn't super clear that all that listed out debt is student loans only.  The only reason I split it between mine and his is that is how the tax benefits are split even when you are married.   

The financial adviser that we may be meeting with is fee only of course, I am not that stupid.  And its to get more opinions.. I don't blindly follow and he is not hired just by meeting.  I try to do my research first. 

Thank you all for the thoughts and advice.  I don't know why its so hard to just 'spend' the money to erase the debt already, it just seems crazy to be able to do so. 

As for the separate finances thing... I also hope we stay forever together, it is a death til you part kinda thing after all and I don't want either of us dying.  I understand where you are all coming from but we have joined finances so a lot of our monthly payments are to his student loans which could be going directly our saving instead.  I am in charge of the finances since he isn't the greatest at it so I am trying to make the best decisions for our family. 

Glad I didn't miss anything when my first reaction upon receiving the money was to pay off the student loans, cars, and mortgage.  I know we are not as hardcore as you all yet but we are trying to get on the right path.  I mostly wanted to see if anyone would recommend keeping some of the low interest student loans since some are really low & tax deductible vs investing that payoff money... wondering if there was a magic number of anything over _% pay off, anything under invest?  Looks like most of you recommend getting rid of it all. 

I will try to start another thread with more $$ details for more specific investing advice when I get the chance.  You all rock. 
« Last Edit: September 14, 2013, 11:02:15 PM by engineerjourney »

sleepyguy

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #17 on: September 14, 2013, 11:03:30 PM »
You fluked out... RIP to your grampa though.  Not rocket science... play off all the higher interest debt first and clean up your act... that is way too much CC debt.  Honestly I can see you being in this same situation about 7yrs down the road... I'm not kidding.  Unless you change your lifestyle drastically.

Doesn't matter, what's smarter long term, optimum... blah blah blah.  You just have to change your habits.  That starts with eliminating all your debts.  Do that, start fresh, and start smart.

FA?  Just play off your debts... don't let those crooks take any of it.  Just my 2cents.

engineerjourney

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #18 on: September 14, 2013, 11:15:55 PM »
You fluked out... RIP to your grampa though.  Not rocket science... play off all the higher interest debt first and clean up your act... that is way too much CC debt.  Honestly I can see you being in this same situation about 7yrs down the road... I'm not kidding.  Unless you change your lifestyle drastically.

Doesn't matter, what's smarter long term, optimum... blah blah blah.  You just have to change your habits.  That starts with eliminating all your debts.  Do that, start fresh, and start smart.

FA?  Just play off your debts... don't let those crooks take any of it.  Just my 2cents.

Dang you guys are really rough on newbies aren't you.  For all future posters: WE HAVE NO CC DEBT!!!!!!!!!!!!  We did not RUN this debt up by our current lifestyle, we are already changing! Most of it paid for our 5.5 year education including masters degrees in engineering that allowed us to both get fabulous jobs.  Once we get rid of it we DO NOT spend a lot of money on SHIT.  We will not get in this situation again.  Most of that student loan debt also is from my husband who unfortunately trusted his parents (one of which is an accountant?! wtf) when they told him to take out these loans... he had several 8-9% student interest loans, who advices that to their kid?!!  Anyway, I already cleaned up some of his loans and as I said above, I am now in charge of the finances and I pay way more attention to them than he did when he was a stupid kid in college.   I am sorry I was not clear enough in the first post for people to understand that this isn't a lifestyle.  We barely spend money besides for these stupid loans (including student/car/less than 20% down mortgage in the stupid).  I am not going to say all of it was a great idea (like the cars) but I guarantee we will never be in this much debt again.   

Again, I will work on expressing the situation clearer next time concerning what the debt is.  Thanks.
« Last Edit: September 14, 2013, 11:23:30 PM by engineerjourney »

beltim

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #19 on: September 14, 2013, 11:30:36 PM »
You fluked out... RIP to your grampa though.  Not rocket science... play off all the higher interest debt first and clean up your act... that is way too much CC debt.  Honestly I can see you being in this same situation about 7yrs down the road... I'm not kidding.  Unless you change your lifestyle drastically.

Doesn't matter, what's smarter long term, optimum... blah blah blah.  You just have to change your habits.  That starts with eliminating all your debts.  Do that, start fresh, and start smart.

FA?  Just play off your debts... don't let those crooks take any of it.  Just my 2cents.

Dang you guys are really rough on newbies aren't you.  For all future posters: WE HAVE NO CC DEBT!!!!!!!!!!!!  We did not RUN this debt up by our current lifestyle, we are already changing, the most recent loan was started over 2 years ago!! Most of it paid for our 5.5 year education including masters degrees in engineering that allowed us to both get fabulous jobs.  Once we get rid of it we DO NOT spend a lot of money on SHIT.  We will not get in this situation again.  Most of that student loan debt also is from my husband who unfortunately trusted his parents (one of which is an accountant?! wtf) when they told him to take out these loans... he had several 8-9% student interest loans, who advices that to their kid?!!  Anyway, I already cleaned up some of his loans and as I said above, I am now in charge of the finances and I pay way more attention to them than he did when he was a stupid kid in college.   I am sorry I was not clear enough in the first post for people to understand that this isn't a lifestyle.  We barely spend money besides for these stupid loans (including student/car/less than 20% down mortgage in the stupid).  I am not going to say all of it was a great idea (like the cars) but I guarantee we will never be in this much debt again.   

Again, I will work on expressing the situation clearer next time concerning what the debt is.  Thanks.

A lot of people don't really read the posts, they just see "debt" and go on a spiel.  The fact that none of the interest rates are reasonable for credit cards (at least one that amount of debt) should have been a clue that it isn't credit card debt.

I'll play devil's advocate here.  And actually, it's a fairly easy argument to make: several posters have responded that you should invest money rather than use all of it to pay down debts.  There is no mathematical reason to pay off debt at an interest rate lower than your mortgage rate if you're willing to carry mortgage debt while investing.  This is a risk/reward thing: a lot of people here will advocate for no debt before investing, and a sizable number will advise leverage for real estate (i.e. a mortgage) or investing while carrying mortgage debt.  I count at least $23k in debt at an interest rate lower than your mortgage, so I'd definitely invest that much instead of paying it off.  Heck, from a financial point of view, it'd make more sense to pay off $23k more in the mortgage than paying off the lower-interest rate loans.  But I'd invest it.


Mazzinator

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #20 on: September 14, 2013, 11:45:25 PM »
Quote
. wondering if there was a magic number of anything over _% pay off, anything under invest?  Looks like most of you recommend getting rid of it all. 

I believe the magic number is somewhere around 4% or 5% ish (rates higher than that get rid of)

Sorry for your loss!

engineerjourney

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #21 on: September 15, 2013, 08:18:04 AM »
Thank you beltim, Mazzinator and everyone else who was able to understand my first and subsequent posts.  I will have to sit down and figure out what the risk/reward we are willing to take.  Going into this I was thinking everything over 5% should definitely be payed off but now I see it could possibly be lower and depends, though as Mazzinator points out, anything under 4.75% (the mortgage) would be better put toward the mortgage.   You all have given me a lot to think about.  Thank you. 

Also, thank you everyone for your condolences about my grandpa... believe me I would rather still have him than this money :(

Villanelle

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #22 on: September 15, 2013, 09:16:03 AM »
If you are considering throwing more at the mortgage and keeping some of the lower interest student loans, consider job security as well.  When you eliminate a debt, you eliminate that payment from your monthly obligations entirely.

Paying down the mortgage doesn't work that way.  Well, if you have an IO loan, I guess it would decrease your monthly minimum.  But if you get rid of all of those student loans, if you lose a job, then what you need to get buy each month is probably lower. To me, that's not an inconsequential consideration.  So maybe paying off a few <4.75% loans costs you more in the long run than putting that money toward a mortgage at a higher rate.  But it buys you a bit of security if you ever find yourself in a tight spot. 

I'd still pay of everything, get the loan below the PMI threshold, and then invest.

engineerjourney

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #23 on: September 15, 2013, 10:10:43 AM »
Villanelle, you make a great point.  I do believe both my husband and I have very secure jobs but you never know... paying ahead on the mortgage will eventually lead to no monthly payments but that will not happen right away like it will for the student loans. 

dorothyc

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #24 on: September 15, 2013, 10:28:45 AM »
I ran your debt numbers, payments and interest rates through the snowball calculator at whatsthecost.com. Assuming a monthly payment of $1900 a month including the $74 dollars his parents are paying, on your current payment schedule you would be debt free in 80 months and pay interest of about $21,638, assuming the loan his parents are paying on is at zero interest. Since you asked for input on what would be the most valuable thing to do with the inheritance money, you can consider that paying off the debt immediately earns you at least the saved interest over the schedule you are currently on.

One thing I did notice is that the payment his parents are making of $74 dollars on the principal balance of $9259 is a very small payment - when I plugged that one in on its own, even assuming zero interest, as you didn't mention the interest rate, at that rate it would take 126 months, or ten and a half years to pay off, although I'm sure at some stage that one would be attacked more aggressively.

 

engineerjourney

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #25 on: September 15, 2013, 10:42:54 AM »
Thank you so much for doing that dorothyc!!  Further reinforcing the decision to pay off the debt first.   

As for the loan his parents are paying... they are very weird about money and try really hard to not let us take it over and get really offended when we try to.  They get so upset anytime we get the dinner payment in before them (pay for their dinner, usually because they are visiting us) that we try not to ruffle their feathers when we can.  The worst part is that we already make a lot more money than them so I am not sure what they think they are protecting us from :-/  We plan on trying again to pay that one off ourselves; I hate that DH had his parents so involved in his finances when in school (he didn't even know any of the online logins when we graduated because his parents set them up)  :(   

aj_yooper

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #26 on: September 15, 2013, 12:02:37 PM »
Welcome to MMM.  I am happy you are posting and hope we can help you optimize your finances.

Call up Vanguard and invest the inheritance money in index funds.  You may want to do it only in your name, or not.  My wife and I also inherited money, but we co-mingled it.  YMMV.  A chunk of money invested at your age will become awesome in time.  Don't use it to pay off current manageable debt.  Also, go to Bogleheads http://www.bogleheads.org/wiki/Bogleheads_investing_start-up_kit and start learning more about investing and read Rick Ferri's All About Asset Allocation: The Easy Way to Get Started, Second Edition  Learn about asset allocation and develop your investment policy.  If your money doubles every 10 years, you will be a millionaire in 20 years without any further saving on your part.

Personally, I don't think you have a mountain of debt.  You both have masters in engineering!  Yes, you have student loans of about $100k, many at low interest rates, 2 financed cars, and a mortgage with PMI.  Since you are new to MMM, I would find a way to end the mortgage insurance ASAP because that charge does not benefit you, only the owner of the loan.  Consider re-engineering your car situation and find a more efficient solution to transportation and logistics.  Pay off your student loans with a higher priority to the higher interest rates.  Max out your 401k accounts and build up
an emergency fund (3-12 months expenses).  None of this should be difficult with a high income and lower expenses.  If you keep your expenses low and keep your income up, you will be on a roll financially. 

Best wishes.

thebeach

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #27 on: September 15, 2013, 07:07:38 PM »
I agree 100% with aj_yooper.  I am in a very similar situation to yours and would only add two more things:

1) Consider setting up a revokable trust for you and your husband.  When my mom passed away in March, we were setting up one for her.  Since she passed before she could sign it, it's now in my name.  The condo and lot of savings/investments are in it- including my "emergency stash."

Why set up a trust?  It protects you from most lawsuits and health issues.  Mom was looking at $15k a month in out of pocket healthcare expenses- Medicare didn't help that much and when you combine polio and MS, the costs aren't cheap.  She was going broke fast and medicaid wouldn't step in to pay for medical bills until she had sold her condo and was completely broke.  Everything she had worked for would have been gone in a short time.  With a trust, a lot of that is mitigated.  Medicaid and the government can't (in theory and in practice) force the trust to go broke paying for your healthcare.  It's like having a rich uncle who helps out when you need it. Specifically, the house in a trust is protected from being sold, etc... after five years and you can't be forced to sell all assets in the trust.  The trust legally ensures that the money goes to paying your mortgage, food and living expenses, then any money left over goes to other bills, so will not be eaten alive by unforeseen circumstances.  (I think I explained that well, please let me know if you want more details.)

The trust should cost $1,500-$2,000 to setup (one-time fee) and is well worth it, with the money you two are looking at making.  The purpose is to help sustain you in extreme events: like losing a job, healthcare issues, someone dying before they should, etc...  You would be the trustee and beneficiary.  A trust is used very frequently, it's worth taking a look. On the plus side, it will help keep your husband's parents outside of your finances as well. A trust can also be told to pay off your school loans as well.  Let me know if you have more questions.

2) Talk to a financial PLANNER, not an financial advisor.  Planners charge $0-$1,000 to look at your situation and come up with a life-long plan.  Spend the time to find the ones that give free consultations.  They can talk to you about insurance, trusts, investments, etc...  They charge a flat fee once, you can talk to them again when your life changes, such as having kids, new job, etc...

My planner cost nothing and helped me with the trust stuff.  I referred a friend and get a free consult whenever I want.  He makes money off using their recommended products.  Go get 2-3 consults and compare notes.


In the end: you've been presented with a great gift and opportunity.  I recommend looking at your life from when you're 80 and then planning accordingly.  I am also a Hospice volunteer and see way too many people be screwed over financially and screw themselves over, because they didn't plan for extreme events like their spouse having a long-term terminal illness.  Again, I like everything aj_yooper says as well. 


engineerjourney

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #28 on: September 16, 2013, 06:32:48 PM »
Thank you for everyone who replied to this thread and gave me their inputs.  We have looked over everything on our plate and have decided to do the following:  Pay off most of the student loans, pay off my car loan, and pay down the mortgage to get rid of PMI.  After that we are maxing out our 401Ks, opening two Roth accounts and maxing them out for the year and then opening a brokerage account with the rest (leaving some buffer/emergency funds in the regular savings account).  The result will still be a lot less bills per month while saving more!  I started a new thread in investor alley named "401K, Roth, Brokerage, what goes where?" if you would like to weigh in on the fund options for us.  Thanks again!

prof61820

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #29 on: September 21, 2013, 07:14:44 AM »
I consider student loan debt worse than mortgage debt (primarily because the student loans are non-dischargeable in the event of an emergency).  I would get rid of evry last one of those now that you are flush and bank/invest the minimum payments you have been making to rebuild the inheritance windfall.  I agree with other posters that you should also consider refinancing if you can drop your interest rate and take care of the PMI issue at that time.  Don't take on any new debt until the $240K is rebuilt through saving and investing.

Deano

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #30 on: September 29, 2013, 06:58:33 AM »
I know I'm late to this, but I'd like to share my experience. My wife and I had about 40k in student loans (we both have degrees beyond undergrad, 2 for my wife). I came into some money, 50k, which I used to pay down all of the debt. As you've mentioned in your post, your current life seems relatively frugal (minus the F150 penis enlarger). Use the money to pay down your debt, the student loans. Debt has a mental toll, getting rid of it is like a new beginning, it was for me. It took me about 18 months to get back the 40 I used to pay off our loans and you're much younger. You get a guaranteed return...you don't get that on investments or even a house (2008 is calling....), take advantage. I know I know...the math! Screw the math, security can, on occasion, trump the math in personal finance.

Cars? Sell the F150, it's useless. I see so many of these things up here in Canada (the #1 selling vehicle here), never with any dirt on them or tires that could warrant actual use off-road. A smaller truck is fine if one is needed.

PMI...sure, pay down the mortgage, particularly as you don't have the best interest rate going. Have 60 plus grand puts you in good stead for starting your stache proper, now challenge yourself, how long until you can back to the full amount??

Oh, I can imagine you've already made your decisions, maybe you could fill us in?

engineerjourney

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #31 on: October 15, 2013, 04:07:45 PM »
Hey all! 
Update:  Paid off all student loans (except one $2,000 at 1.33%) and one car loan.
               Paid down principal of mortgage to the tune of $34,000 (to get 20% down)
               Am now refinancing the mortgage to a 12 year loan, 2.79% with $450 closing costs (so amazing, only increasing our payment like $200 and saving sooooo much interest), we had almost 28 years left with 4.75%
               Am maxing out 401K and barely noticing since we no longer have student loan payments
               Am about to open and max out Roth for me & Roth for Husband
               
Started a Mint account to track our spending to know what can be improved.  Not sure if I really like the interface.  Might try YNAB too.  Before finding this forum I thought I was 'frugal', oh how wrong I was.  Being frugal compared to most Americans is nothing to be proud of, haha.  I have been reading a ton on here and have been learning a lot.  Will hopefully have a budget case study post in the next couple months.

Talked to a financial adviser but decided I can do a well enough job myself.  He wasn't too bad and talked about financial independence but a couple things he said didn't jive with me.  He said our 401K through the company wasn't good and that he might be able to get us into other things if we were clients but our 401K has ER fees of 0.04%-0.14%... some of them are better than Vanguard! He also wasn't so keen on Roths for us...

Overall its been pretty awesome getting everything in line and I wish I had done it sooner.  I am so grateful to my Opa (grandpa) for this new start but I sure would rather have him so its a mixed blessing. 

okashira

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #32 on: October 15, 2013, 04:32:53 PM »
Looks like you made the right decisions except for the F150 (and the Hyundai to a lesser degree)

But why keep that one silly $2000 student loan? Nostalgia? lol. With all that cash, it would be nice just to nix it.
Call it a circule of control / circle of concern thing. Out of sight of out mind. I would pay it.

Great job on the mortgage.

Good call on the adviser. Your 401k sounds pretty good. Mine is similar. We have access to institutional class Vanguard funds which have insanely low ER's. Even better then the Admiral shares.
« Last Edit: October 15, 2013, 04:34:51 PM by okashira »

engineerjourney

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #33 on: October 15, 2013, 04:46:13 PM »
Thanks Okashira... I agree that the cars are the main weak point.  I don't know if we will get to the point of getting rid of either of them soon.  That is something we will have to consciously decide if it is worth it to us.  My DH is still of the mindset of "what would I do if I retire" so we have a lot of room for improvement.  As I said I am going to try to really track our spending and I know we have a lot to improve. 

As for that one student loan... haha, I have a feeling I will be paying it off sooner rather than later.  Its an adjustment to think of not having these student loan payments.   They are not really regrets because they allowed both of us to get highly competitive degrees with really good jobs but man, we sure went to an expensive college!!

And yeah, our 401K is pretty awesome :-)

beltim

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #34 on: October 15, 2013, 04:46:48 PM »
Congratulations!  Looks like you're making all the right moves, and you've set yourself up to quickly grow net worth.

The only other thing I'd like to mention is the idea that paying down debts (what's left of them) instead of keeping the cash and payoff off on schedule is somehow safer if you lose a job.  This is ass-backwards, and terrible, terrible advice.  If you were to lose your job X months from now after having saved $20k, then you would have $20k to live on and continue making payments while finding another job.  If you instead had put that $20k into repaying debt, then you would not have that buffer, but would still have to make those payments.  Obviously, individual comfort levels come into play here, in terms of how many months worth of expenses you want in cash, and in other less-accessible vehicles (taxable investments, Roth IRA, other retirement accounts, etc.).  But some buffer is absolutely necessary.

engineerjourney

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Re: Inheritance... pay off tons of debt, invest, both?
« Reply #35 on: October 15, 2013, 04:50:54 PM »
Beltim, no worries we are going to keep a buffer in boring savings accounts for sure.  We haven't settled on an exact number but since we both work in the same industry there is no way we are not going to keep a buffer that accounts for both of us being laid off.   Good thoughts thanks!