Inheritance Coming - Starting over at 40

[bawaboy]

I am new to the Mustachian way of life/thinking and am looking for some advice from the seasoned veterans - many thanks in advance.

40 years old, married with 2 kids and a $100k annual household income. We have been paying down our debts methodically - knowing full well the pain of being a debt slave. We went thru a foreclosure 2 years ago, when my job moved us and we couldn't sell our home due to a bad market. We have $50k equity in the home we live in currently but no credit. I am actually ok with the "no credit" piece as we have no plans on ever obtaining another credit card and with all we have been thru financially, I can live with our 6.125% mortgage until things get better. Just thankful to have a place to call home.

We have about $25k in debts to payoff. They include:

$11,000 - Discovercard at 18%
$3500 - School loan at 6%
$5,000 - Line of Credit at 8%
$6,000 - Credit Card 19%

Assets include:

$50,000 - equity in current home (was told it is a minimum of 3 years from date of foreclosure before we can consider a re-fi)
$50,000 - 401K
$1500 - savings
Both cars are paid for - approx. value of $8,000 on the Durango and $2500 on the Grand Am.

We will be receiving a $50,000 inheritance in the coming weeks. I really want to be prepared for it and have a plan ready to go. The common sense thing would be to pay off the $25k in debt and owe on nothing but the house. That leaves us with $25k leftover  - any advice on what to do with this?

The only major annual expense we have is the need to save $5600 for property taxes as we don't escrow that. I am also thinking that with no credit available that we want to remain somewhat liquid with our investments? Any/all advice is welcome and appreciated. Let me know if I can provide any other info to help you with your assessment.

God Bless!

[sandiahiker]

$1500 is savings is very small.  Seems like the $25k should be a cash cushion, rainy-day-type situation.  Would that cover 6 months of expenses?

Mark

[Khan]

I would say payoff the debt, and then with the extra 25k?

Up your 401k contributions(dependent on how good/shitty your employer's program is), put some of the 25k into your savings account(Congratulations, you now have a true -emergency- fund). Think about funding a ROTH IRA or 2(for you and your wife, -5500 contribution limit each, 11k to fully fund for 2013, you can wait up until April to do that).

Don't close out both those credit cards. Depending on the quality of the cards(rewards, etc), you may want to hold onto one or both of them. Also, I know you don't care as you're angry about getting out of debt, but length of accounts is one of the major factors for credit score, and it's never a bad thing to have a decent credit score. It gives you optionality and flexibility, which as you've witnessed being forced to foreclose due to job moving, is very important.

Also, have you considered the tax implications of receiving this inheritance? Are you going to be on the hook for any?(I have absolutely no experience with inheritances).

[bawaboy]

$1500 is savings is very small.  Seems like the $25k should be a cash cushion, rainy-day-type situation.  Would that cover 6 months of expenses?

Mark

Thanks Mark - I agree that $1500 is way too small of a savings account. I have been a follower of Dave Ramsey and was doing the debt snowball after saving up a quick emergency fund.

[bawaboy]

I would say payoff the debt, and then with the extra 25k?

Up your 401k contributions(dependent on how good/shitty your employer's program is), put some of the 25k into your savings account(Congratulations, you now have a true -emergency- fund). Think about funding a ROTH IRA or 2(for you and your wife, -5500 contribution limit each, 11k to fully fund for 2013, you can wait up until April to do that).

Don't close out both those credit cards. Depending on the quality of the cards(rewards, etc), you may want to hold onto one or both of them. Also, I know you don't care as you're angry about getting out of debt, but length of accounts is one of the major factors for credit score, and it's never a bad thing to have a decent credit score. It gives you optionality and flexibility, which as you've witnessed being forced to foreclose due to job moving, is very important.

Also, have you considered the tax implications of receiving this inheritance? Are you going to be on the hook for any?(I have absolutely no experience with inheritances).

Great advice on the credit cards - thanks so much. I may leave them open after paying off the balance. In my inheritance tax research, our state apparently does not tax estates under $100k which was a welcome site.  I am dying to start investing so being debt free (other than the house) should allow us more $ monthly to invest and begin living a different/better life.

[ethilo]

$1500 is savings is very small.  Seems like the $25k should be a cash cushion, rainy-day-type situation.  Would that cover 6 months of expenses?

Mark

That would be one helluva rainy day!  Just kidding :)  But yes, I say +1 to 6 months worth of living expenses.  Rule of thumb with just about any sort of planning: "You never know" or said in another way "hope for the best and plan for the worst."