Case Study - What to do with $50k

[Soni]

Does anyone  know who Irwin Allen is? Well, neither did I until I found out he was my great uncle and there was a small inheritance coming my way. $50,000. It’s a great opportunity to make some headway. I’ve lived very frugally because my income has rarely been over $15,000/year, but I’ve never been able to put anything away. On top of the inheritance I just started a new job and I’m now earning $39,000 and living on that same $15,000. At 37 years old it’s time to start putting cash away.

Life Situation: Single, no dependents. Living in Marquette, Michigan.

Gross Salary: $39,000yr / $3,250mo

Taxes: $7,200yr / $600mo

Current Expenses:
   
   Personal
   Groceries                      $225
   Restaurant/Bar              $150
   Gas                                $30
   Auto Insurance              $140
   Car Payment                 $290
   Health Insurance           $175
   Pets                               $75
   Phone                            $68
   Entertainment                $25
   Misc.                              $200 (I know this is high and could be broken down better)
   Monthly Expenses      $1,378


Assets:
   Checking Account:   $500
   Savings:                $3,500
   Retirement          $0   
   Investments          $0

Liabilities:     
                Car Loan Payoff: $6,424
                Rate: 3.9%
                Term: 24 more months

      
House:
I list this separately because it’s held in an LLC with a friend with an 80/20 split. I won 80%. I haven’t included it in my income and expenses because I treat it as a separate entity. I could use help on this situation, but it’s not the main point of my question and to easy to get bogged into the details. I’ll post in the real estate forum on this one later. But here’s a relevant snapshot. 

Market Value:                     $200k
Bank Loan:                         $112k
Personal loan for repairs:    $46k (this is money that I've loaned to the LLC)



Rental Income:            $2,900/mo
Mortgage:                    $1,416
All Other Expenses:     $1,050   

Expected Expenses:
Drive way and Parking: $12k (there’s currently 4 spaces for 9 bedrooms)
Windows:                  $6k



So, onto my question:
   
In this scenario, what’s the best use of $50k?

My thoughts are to pay off the car loan, put 10k into a accessible savings for rainy day fund then put the other $33k into longer term higher rate investments. In this case, considering that I have nothing invested right now, where do I start?

I could also put some money into the house (driveway and windows). These have to be done either way, I’m just not sure if it’s best to refinance the house to fund these improvements or use some of this money to do so.

As you can see, I'm getting a late start but am trying to find the right way. I really appreciate any advice or questions that you have. 

[forummm]

What is the interest rate on your personal loan? Do you have a 401k available at work?

[ShoulderThingThatGoesUp]

Uh, he died in 1991. Make sure that you are not being scammed here. If you're asked to send in a bunch of personal information or send in money, don't do it.

[Soni]

What is the interest rate on your personal loan? Do you have a 401k available at work?

My personal loan to the house is at 3%. As for the 401k, nope. It's a brand new chamber of commerce and I'm their first employee. We might be able to set one up though.

Uh, he died in 1991. Make sure that you are not being scammed here. If you're asked to send in a bunch of personal information or send in money, don't do it.

Thanks for the concern, but it's legit. His wife passed last year which kicked the will into effect. I went out to CA to visit the family that I didn't know I had. Pretty bizarre to get a windfall from someone you didn't know. Good people and a strange situation.

[fartface]

Do you have to pay income tax on the $50K? I'm not sure if there's inheritance tax at federal or state level, but if there is make sure you set that aside come tax time.

[Soni]

Do you have to pay income tax on the $50K? I'm not sure if there's inheritance tax at federal or state level, but if there is make sure you set that aside come tax time.

I've talked to both my accountant and the estate's, it's already been coved by the estate so the $50k is tax free.

[Texan]

Id pay off all your debt. That is a huge burden at least IMO. Then, invest the rest in VTSAX or some total stock fund.

Also, you might consider some personal development, like taking some cert classes and gaining some additional skills. Boosting your income is important and gaining skills will surely help. Learn Java or C++, or change careers? Welding classes etc. Explore a possible career change.

This money could be your big chance.

Hope this helps

[Chrissy]

My thoughts are to pay off the car loan, put 10k into a accessible savings for rainy day fund then put the other $33k into longer term higher rate investments. In this case, considering that I have nothing invested right now, where do I start?

I could also put some money into the house (driveway and windows). These have to be done either way, I’m just not sure if it’s best to refinance the house to fund these improvements or use some of this money to do so.

Yes, to the emergency fund.  Although I don't believe you need to add more than $4,500 to your e-fund, which brings your total cash-on-hand to slightly over 6 months of expenses.  Very respectable.

The car loan and a refinance or HELOC is debatable.  It's better to invest cash in the market, rather than use it to pay down a loan @ < 4%-5% because the cash is likely to do better in stocks.  However, in your shoes, I would pay off the car and pay for the real estate improvements outright, because the position of employment is new, and perhaps tenuous.

For the remainder, open a ROTH IRA with either Fidelity or Vanguard, putting in the full $5,500 you're allowed for 2015.  Put the rest in the same institution in a taxable account.  Every year, transfer $5,500 into the ROTH.  I'd go with an index fund like the Spartan Total Market (FSTMX) or Vanguard Total Stock Market (VTSAX) as Texan suggested.

If your employer starts a 401k, look into living off the funds while putting as much as you can of your salary into the 401k  401ks are usually a pretty good deal.

[Soni]

Id pay off all your debt. That is a huge burden at least IMO. Then, invest the rest in VTSAX or some total stock fund.

Also, you might consider some personal development, like taking some cert classes and gaining some additional skills. Boosting your income is important and gaining skills will surely help. Learn Java or C++, or change careers? Welding classes etc. Explore a possible career change.

This money could be your big chance.

Hope this helps

Thanks Texan. I agree. Paying off my car loan is a biggie. As for the skills, I've landed a good job for the area I'm in and it's doing what I love. Plus, a 12% raise for 2016. I'm the Executive Director of the Chamber of Commerce. I've also served on our city commission and helped over 50 businesses launch as a consultant. I've just valued my free time WAY more than trying to make money. Now it's time to turn that around.

Yes, to the emergency fund.  Although I don't believe you need to add more than $4,500 to your e-fund, which brings your total cash-on-hand to slightly over 6 months of expenses.  Very respectable.

The car loan and a refinance or HELOC is debatable.  It's better to invest cash in the market, rather than use it to pay down a loan @ < 4%-5% because the cash is likely to do better in stocks.  However, in your shoes, I would pay off the car and pay for the real estate improvements outright, because the position of employment is new, and perhaps tenuous.

For the remainder, open a ROTH IRA with either Fidelity or Vanguard, putting in the full $5,500 you're allowed for 2015.  Put the rest in the same institution in a taxable account.  Every year, transfer $5,500 into the ROTH.  I'd go with an index fund like the Spartan Total Market (FSTMX) or Vanguard Total Stock Market (VTSAX) as Texan suggested.

If your employer starts a 401k, look into living off the funds while putting as much as you can of your salary into the 401k  401ks are usually a pretty good deal.

Thanks Chrissy,

I appreciate your thoughtful advise. I am paying off the auto loan and I'll do some research on the ROTH and investments. As for the estate improvements, why do you recommend I pay them outright?. I was thinking refi the house, first because the current rate is 6%! Second, if I use a HELOC to cover the work, then the tenants will pay for the improvements and I can hold onto the $50k for investing. You're right, my position is somewhat tenuous which makes me want to hold onto as much cash as possible.

[Chrissy]

Thanks Chrissy,

I appreciate your thoughtful advise. I am paying off the auto loan and I'll do some research on the ROTH and investments. As for the estate improvements, why do you recommend I pay them outright?. I was thinking refi the house, first because the current rate is 6%! Second, if I use a HELOC to cover the work, then the tenants will pay for the improvements and I can hold onto the $50k for investing. You're right, my position is somewhat tenuous which makes me want to hold onto as much cash as possible.

I had no idea your mortgage was at 6%.  Must've missed that somewhere.  Definitely refinance.

Using credit for the improvements is debatable because it is a relatively low amount ($18k), and having less mandatory monthly outflow is preferable (in my opinion) if your job looks like it might go away.

A ROTH is an excellent retirement vehicle if you think you might need the money early, since you can withdraw your contributions (but not the growth) at any time without penalty.