Author Topic: What should I do with this inheritance?  (Read 7212 times)

minnie76

  • 5 O'Clock Shadow
  • *
  • Posts: 14
What should I do with this inheritance?
« on: January 31, 2013, 10:48:25 AM »
Hi everyone,

I was hoping for some wise advice on how to best distribute some inheritance money I recently received.  I have no credit card debt and just recently opened an IRA to start saving for retirement when I started a good paying job in June of last year.  I am in my early 20's and plan on starting grad school soon for an MBA that will be partially funded by my employer, I will hopefully be able to pay as I go for my portion.  I also just opened up a 401k through my employer and will be contributing enough to get the maximum matching. 

I would like to free up cash flow since I will be going back to school but I also want to start saving for retirement and investing. I am trying to decide if I should pay off as much of the student loan debt as possible or max out my IRA for 2012 and maybe 2013.  Or should I save it to cover grad school tuition as necessary since the student loans will go into deferrment when I go back to school.  Please let me know if you need any other information. 

Inheritance: $14,000 - I already set aside some for taxes

Assets:
House: about $55k
2012 Focus: about $19k  $14k
IRA: $1,850 - Currently paying about $300/month into this

Debts:
Student Loan 1: ~$1,880 at 6.55%
Student Loan 2: ~$2,702 at 5.8%
Studnet Loan 3: ~$8,250 at 6.55%
Student Loan 4: ~$5,800 at 5.62%
Mortgage: $41,500 at 5.375%
Car Loan: $19,400 at 0%--I know...at least it's 0% interest and a fuel efficient car right...
« Last Edit: January 31, 2013, 01:02:45 PM by Must-Stash »

James

  • Handlebar Stache
  • *****
  • Posts: 1680
  • Age: 47
  • Location: Rice Lake, WI
Re: What should I do with this inheritance?
« Reply #1 on: January 31, 2013, 11:06:54 AM »
Car Loan: $19,400 at 0%--I know...at least it's 0% interest and a fuel efficient car right...

Back the truck up, you are asking a question on MMM forum, we aren't just going to ignore this.  Sell the car and use part of the inheritance to purchase a mustachian vehicle based on your true needs.  Frees up cash flow and fixes a problem that needs fixing.

After that I think it's a wash between paying off school loans vs investing.  I'd probably pay off loans and use the increased cash flow (from dropping car and student loan payments) to pay off the remaining school loan amount and save for school going forward.  Neither is wrong as long as you don't spend any of it.

It's absolutely great you aren't going to just blow this inheritance, and the MBA partially funded by your employer is huge for you future earnings.  If you drop your expenses and pay everything off except for your mortgage while at the same time paying as you go for the MBA, you will be on the path to reach FI very quickly!

nofool

  • 5 O'Clock Shadow
  • *
  • Posts: 69
Re: What should I do with this inheritance?
« Reply #2 on: January 31, 2013, 12:32:22 PM »
Car Loan: $19,400 at 0%--I know...at least it's 0% interest and a fuel efficient car right...
Back the truck up, you are asking a question on MMM forum, we aren't just going to ignore this.  Sell the car and use part of the inheritance to purchase a mustachian vehicle based on your true needs.  Frees up cash flow and fixes a problem that needs fixing.

Agreed. All in all, I think you're in good shape, but that car is really not helping you out at all.

Dynasty

  • Stubble
  • **
  • Posts: 181
Re: What should I do with this inheritance?
« Reply #3 on: January 31, 2013, 12:34:13 PM »
I don't think the OP should necessarily sell the 19.4K car.

My reason is, the 19.4K car with 0% interest is most likely a newer car, and will provide 10 plus years of service.

In order to make it worth his while, he'd need to get a car for 10k or less. And that puts you in 2009 Kia Rio territory. No one should suffer so much to drive one of those.

If the OP trades the 19.4K car in, he might be lucky to get 16K trade in...

End of the day, save a few thousand dollars getting an older car, that is going to need to be replaced sooner.  End result, probably spending more money in the long  run. 

I've grappled with this myself. Currently I have a 15K car loan, on a really nice car. I've considered downgrading my ride and having no payment. Test driven countless cars, wasted a lot of salesman's time, ran the numbers at home. My insurance would go down, save a little bit on gas and tires. But at the end of the day, my car is going to have a much better resale value in five years or even ten years than a 2009 Kia Rio, Hyundai Accent, or Chevy Cobalt.

Last but not least, if the OP really likes his car, there is the potential of seller's remorse. At least for me in my scenario, that has ran pretty strongly through my head on every car I've driven. Is the money I might "potentially" save worth trading down to an economy car in the big picture?
« Last Edit: January 31, 2013, 12:36:04 PM by Dynasty »

Dee18

  • Handlebar Stache
  • *****
  • Posts: 1741
Re: What should I do with this inheritance?
« Reply #4 on: January 31, 2013, 12:44:38 PM »
Assuming you have a solid emergency fund, pay off the 6.55% loans to the extent possible.  That is a guaranteed return on your money; you can not count on earning 6.55% by investing it.

John74

  • 5 O'Clock Shadow
  • *
  • Posts: 92
Re: What should I do with this inheritance?
« Reply #5 on: January 31, 2013, 12:47:19 PM »
First, an inheritance would not be taxed. In the US, estates get taxed, not inheritances.

Second, I would use the money to pay off student loans. Student loans can never be discharged and yours are pretty expensive.

minnie76

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Re: What should I do with this inheritance?
« Reply #6 on: January 31, 2013, 12:51:32 PM »
The problem with the car is that I don't think I could get what I owe for it.  After looking at the blue book value for it it looks like I'm about $5k underwater on it.  I bought it brand new so it lost a lot of the value when I drove it off the lot.  Not the smartest choice but I the car was driving was giving me serious problems and I was the primary caretaker for two ailing relatives and working full time so I didn't feel like I had the time to shop around for a good used car.  I rationalized it by telling myself my payment was less than I was saving for my next car every month, it was very fuel efficient and the 0% interest.  I definitely have buyer's remorse about it though.  I've been debating about trying to sell it and get something older or just driving it into the ground. 

smedleyb

  • Bristles
  • ***
  • Posts: 434
Re: What should I do with this inheritance?
« Reply #7 on: January 31, 2013, 12:58:16 PM »
The problem with the car is that I don't think I could get what I owe for it.  After looking at the blue book value for it it looks like I'm about $5k underwater on it.  I bought it brand new so it lost a lot of the value when I drove it off the lot.  Not the smartest choice but I the car was driving was giving me serious problems and I was the primary caretaker for two ailing relatives and working full time so I didn't feel like I had the time to shop around for a good used car.  I rationalized it by telling myself my payment was less than I was saving for my next car every month, it was very fuel efficient and the 0% interest.  I definitely have buyer's remorse about it though.  I've been debating about trying to sell it and get something older or just driving it into the ground.

I was just gonna post that the Focus is worth around 14-15K at this point.  Selling it here and now may not be the best move, IMO. 

 

Dynasty

  • Stubble
  • **
  • Posts: 181
Re: What should I do with this inheritance?
« Reply #8 on: January 31, 2013, 01:01:22 PM »
Is the blue book you are looking at dealer trade in?

If so, subtract about 1k from that.

Best case/worse case scenario. You spend 5k to get out of you 19.4k car loan, and then spend another 5K on a beater.

You've now spent 10K on a 5K car, plus however much money you've lost on down payment, taxes, payments, etc. There would be a little bit of a tax advantage if you go the dealer trade in route (depending on the state you live in).

Then the question becomes how long will this 5K car be reliable? When is it going to need tires, brakes, maintenance, repairs?

The used car market is terrible now. Used cars are currently way over valued compared to a few years ago. The reason is since new car sales dropped off a cliff, everyone started buying used to save money. So used cars jumped in price.

I have no idea what you bought, but I think you should keep it. Pay the car off, and bankroll the money you'd normally be spending on a payment after the car has been paid for.

John74

  • 5 O'Clock Shadow
  • *
  • Posts: 92
Re: What should I do with this inheritance?
« Reply #9 on: January 31, 2013, 01:05:12 PM »
Why pay off the $19K car loan @ 0% when he can pay off the $19K student loan @ 6%?

The Taminator

  • Stubble
  • **
  • Posts: 132
  • Location: Toronto, Canada
Re: What should I do with this inheritance?
« Reply #10 on: January 31, 2013, 01:09:07 PM »
I guess we can safely assume that the OP isn't in a major urban centre with access to good public transportation? Because if it were me, I'd ditch the car completely and use public transport, my bike and my feet most of the time then use a service like zipcar or autoshare for those times a car was absolutely crucial.

minnie76

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Re: What should I do with this inheritance?
« Reply #11 on: January 31, 2013, 01:15:53 PM »
Haha, no.  The suburbs of Detroit are not exactly known for their stellar public transportation.

I think I'll just start with the highest interest student loans and go from there.  I just wasn't sure if that would be the best course of action since they would be going into deferrment when I start grad school in the spring but since they would still be accruing interest that doesn't make a lot of sense.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5213
Re: What should I do with this inheritance?
« Reply #12 on: January 31, 2013, 01:17:13 PM »
+1 on the student loans, for all the reasons stated.

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 16069
  • Age: 39
  • Location: Toronto, Ontario, Canada
Re: What should I do with this inheritance?
« Reply #13 on: January 31, 2013, 01:21:35 PM »
Well, if you can swing it . . . the ideal situation would be to:

Rent your house out for enough to cover the mortgage.  Rent the smallest, cheapest place you can find that's close to the school you're planning on attending.  Sell your car, buy a bike.  Pay off your student loans, and put some money towards your mortgage.

When you get out of grad school and are working again you should be able to afford a used car should you need it, and can move back into your house.  Or, sell the house completely . . . move close to where you work, and don't get another car.

minnie76

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Re: What should I do with this inheritance?
« Reply #14 on: January 31, 2013, 01:37:29 PM »
Currently my mortgage is only $450/month since I bought a modest house in an area that was hit very hard when the housing market crashed.  I rent out a room for $350 so my housing costs are pretty low.  I plan on paying a lot more towards it once I get rid of the student loans but wanted to try to snowball everything by interest rate. 

I'm going to be working while going to school at night so it may take me a little longer but I will still be making my full salary and getting some tuition reimbursement from my employer.

Believe me, if there was a way that I could get away without having a car I would do it. Unfortunately the area where I live has terrible public transit and I would have to bike through about 3 miles of an extremely rough/dangerous area to get to work.


Another Reader

  • Walrus Stache
  • *******
  • Posts: 5213
Re: What should I do with this inheritance?
« Reply #15 on: January 31, 2013, 01:55:24 PM »
You probably overpaid a little for the car, but in your situation, safe and reliable transportation is essential.  I would not worry about it for a minute.  Your housing is almost free - great job!  Cash flowing the cost of the MBA not paid by your employer - another smart idea. 

I wonder about your mortgage rate.  Do you have equity?  Small loans are hard to refinance, but if you could knock it down to the 3.5 percent range without much cost, that would be worth the effort.

Get rid of those student loans.  They are an alligator following you around.  Deferment only delays the inevitable and interest accrues.  Pay off the three highest interest rate loans and get cracking on the other one.

Other than these small things, you appear to manage your finances wisely.