Author Topic: What to do with inheritance?  (Read 2356 times)

ginjaninjaa

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What to do with inheritance?
« on: April 27, 2018, 03:40:40 PM »
Hi there!

I just received assets of about $25,000 inheritance from my grandfather passing away. I'm wanting to know what to do with it. Broad question so I'll try to provide some details.

I'm 25 years old and make $85000 a year before taxes. I have student loans that total $70,000(~500/mo payments) and a car loan for $24,000(500/mo payments). The car situation is something else that I don't want to discuss in this thread (looking into selling it). I live in Broomfield CO paying about $1500 in rent, not including utilities. I thought this might be a good down payment for a house. I work in Boulder (about 20 min/12 mile commute) and want to live closer to work so I can start biking. The housing market is so high here I don't know how/if that can happen. I'm sure I can find roommates to help pay since the monthly mortgage payment will surely be higher than my current rent.

If I want to keep this money long term then invest into index funds?

I know there are many other variables/details you might need so please ask and I will provide! I was going to do a full case study but this was a sudden large amount of money I just got so thought I should figure this out first.
« Last Edit: April 27, 2018, 04:56:37 PM by ginjaninjaa »

FINate

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Re: What to do with inheritance?
« Reply #1 on: April 27, 2018, 03:43:13 PM »
Any debt?

ginjaninjaa

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Re: What to do with inheritance?
« Reply #2 on: April 27, 2018, 04:56:56 PM »
Just added debt situation.

cchrissyy

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Re: What to do with inheritance?
« Reply #3 on: April 27, 2018, 07:23:48 PM »
what interest rate on the car and student loans?

do you have other savings towards a down payment already?

GizmoTX

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Re: What to do with inheritance?
« Reply #4 on: April 27, 2018, 10:01:38 PM »
Pay off your debt before buying a home.

FINate

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Re: What to do with inheritance?
« Reply #5 on: April 28, 2018, 11:30:34 AM »
Depending on the interest rates, I would pay off those debts and build an emergency reserve before buying a home or investing in index funds. I know, I know, long term average for index funds is likely higher than the interest on the student loans, but student loans have a way of spinning out of control if you get behind on payments due to medical/job loss, and they are not easy to shed in bankruptcy.

If you're going to sell the car, then sell it and use some of the cash to pay off the difference if you owe more than it's worth.

Then, if you don't already, put some in reserve as an emergency fund -- enough to fund 3-6 months expenses. Needs to be something safe and liquid, like a savings or money market account.

Then, if any of the student loans are above about 5% (or variable rate) I would pay those down. Will feel kinda anti-climatic because it's not enough to pay them off, but dropping them down to $45k or $55k is a huge amount of progress.

If your student loans are below about 5% (and fixed rate) I would instead invest the rest in VTSAX. Put it all in and then don't look at it or think about it, just let it ride :)

FatFI2025

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Re: What to do with inheritance?
« Reply #6 on: April 28, 2018, 04:31:07 PM »
Buy the house with a cash flow mindset! I was in your exact position when I bought my first place and it paid off big time.  I'm going to assume here that your student loans are ~5% and car is ~2%. Take the inheritance, buy at 5% down w/o PMI, and get roomies to pay off the mortgage. Hustle for five years -- clean up after irresponsible roommates -- pay off your student loans and your car then you will be money by your 30s. This is a huge gift at such a young age. It's a big bummer that you lost your grandpa, but do him right and work hard to make that gift grow. Also, feel free to wait awhile to mull over the decision...no reason to rush.

ginjaninjaa

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Re: What to do with inheritance?
« Reply #7 on: April 30, 2018, 01:09:01 AM »
I appreciate all the advice so far! Here are some answers to your questions:

Car loan is 24k at 4.5%
Students loans:
17.2k at 3.5%
5.2k at 6.5%
4.1k at 4.4
21.9k at 5.5
11.7k at 5.0
8.7k at 6.6%

Was thinking of refinancing my loans that are 5% and above.
I don't have any savings toward a down payment other than this inheritance.
I have an emergency fund that would last me about 3 months.
I don't think I'll ever be behind on my loans but life can throw curve balls sometimes.
I can sell my car for about 28k at the low end.

WalkaboutStache

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Re: What to do with inheritance?
« Reply #8 on: April 30, 2018, 01:19:43 AM »
I would:

1. pay off the loans, high interest to low first
2. sell the car presto, pay that off
3. use the extra 4k to buy a sensible car (4k all in, taxes, license, the works)

Throw the 500 from the car, plus what you save from not paying comprehensive insurance on your 4K car, plus whatever you are no longer paying into the student loans into paying off the other debt. 

Read this:

https://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

Your index fund might yield more than the 6-ish percent that your loans are costing you, but they might not.  If you pay them off, you will be getting the 6-ish percent savings GUARANTEED.  Nothing in the market today guarantees 6-ish percent.

You have a debt emergency, my friend.  Kill it first before you start doing anything else.

undercover

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Re: What to do with inheritance?
« Reply #9 on: April 30, 2018, 03:09:58 AM »
$25k obviously isn't going to get you anywhere in Boulder so I'd forget that idea. The only way to avoid PMI or a higher interest rate on the entire loan is to get a second mortgage to cover the (usually) extra 10% and that loan would have a higher interest rate.

Still, there's nothing I would even think about buying in your situation unless you wanted to consider Longmont which doesn't make sense at this point.

Pay (most of) the student loans. It's debatable as to whether you should pay off sub 4% debt instead of invest, but I'd still do it anyway personally just to be rid of it since it's not a significant amount. And yes, you should be paying this off first by doing everything you can to save money. I would consider moving in with roommates for a few years and definitely getting rid of that car loan. That car must be literally brand new (or you put a hefty down payment?) for it to be worth that much more than you owe.

Dragonswan

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Re: What to do with inheritance?
« Reply #10 on: April 30, 2018, 06:51:39 AM »
I wouldn't buy a house until you've freed up enough money in your budget to save monthly towards it. 

Pay off the 8.7 K @ 6.6%
Then the 5.2K @ 6.5%
Then the 11.7K @ 5% (use the payment money you save from the first two loans to make up the $600 overage).
Then use the money from all those monthly payments to attack the  21.9K @ 5.5%.  Once this is paid off save the payments for a house down payment.
The other two loans have a low enough interest rate to let them die naturally. 

I'm a red panda

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Re: What to do with inheritance?
« Reply #11 on: April 30, 2018, 08:13:58 AM »
Pay off the debt highest interest rate first; or if the psychological fewer loans thing works for you- pay off the car. 

If you're happy with the debt, and think your market returns will be higher, put it all in the market.  But since you have a number of rates closing in on 7%, I'd get rid of any debt higher than 5% before investing.

cchrissyy

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Re: What to do with inheritance?
« Reply #12 on: April 30, 2018, 09:26:58 AM »
I agree completely with Dragonswan above

frugaliknowit

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Re: What to do with inheritance?
« Reply #13 on: April 30, 2018, 09:29:18 AM »
I would:

1. pay off the loans, high interest to low first
2. sell the car presto, pay that off
3. use the extra 4k to buy a sensible car (4k all in, taxes, license, the works)

Throw the 500 from the car, plus what you save from not paying comprehensive insurance on your 4K car, plus whatever you are no longer paying into the student loans into paying off the other debt. 

Read this:

https://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

Your index fund might yield more than the 6-ish percent that your loans are costing you, but they might not.  If you pay them off, you will be getting the 6-ish percent savings GUARANTEED.  Nothing in the market today guarantees 6-ish percent.

You have a debt emergency, my friend.  Kill it first before you start doing anything else.

+1

FINate

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Re: What to do with inheritance?
« Reply #14 on: April 30, 2018, 10:11:58 AM »
Eliminate those higher rates loans by paying them off ASAP.

Agree with others here -- sell the car and use the difference to buy a cheap used economy car.

If the $17.2k at 3.5% is a fixed interest rate then I would follow the normal payment schedule for this specific debt.

As far as I can tell, right now your net worth is negative, slightly less so with the inheritance.  You are not in a position to buy a house, and stretching to do so will very likely become an albatross around your neck for many years. Houses are extremely expensive to maintain, lock you into a specific location, and if everything goes exactly right you may keep pace with index funds. More likely, you'll sink a bunch into taxes, maintenance, insurance, then find that you lose money when you have to sell it because of job lose or relocation, or simply because you find you can't really afford it. I've seen first hand far too many people make this mistake. Don't buy a house until a) you have a good chunk of net worth b) a sizeable down payment in the  20% range (and this should not be all your NW) c) career and family stability such that you are ready to set down roots for the long term (10 years or longer). There is nothing magical about real estate, don't give into its siren song.

Although $25k may feel like a lot to you it's just a blip on your financial journey. You're here on MMM so I assume you're interested in FI, which means you'll need to amass $600k-$1M or more. Don't let a tiny amount such as $25k wag the dog w.r.t. your financial future. Pay off those higher interest debts and get super aggressive on saving and investing... this will pay dividends for the rest of your life.

YoungGranny

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Re: What to do with inheritance?
« Reply #15 on: April 30, 2018, 10:19:16 AM »
I would use the $25k to pay off the car and have a clear title. That will make it easier to sell in a private sale and get max $$$. Then once you sell the car, if you need a car, budget about $5k to buy a used one and use the rest of the money to pay off the loans. Dig out of debt then save for a house - renting isn't as big of a drain financially as people think it is and rushing to buy a house, getting slapped with a higher interest rate and PMI because your debt to income ratio is high and you have a small down payment will cost money in the long run.

FatFI2025

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Re: What to do with inheritance?
« Reply #16 on: May 05, 2018, 12:37:18 PM »
Ah, I see I'm in the minority recommending that you buy a primary residence. Probably because I stretched to buy my first property at 26 while taking on more student loans and walked away with a 20% after tax annualized ROI. Now at 33, I'm happy 26 y/o me did it. I know we're on MMM here, but I'm pretty sure a chunk of MMM's current wealth came from buying RE with mortgage debt.

The reality is that if you do an analysis of alternatives, after 10 years you will end up ahead by buying the house versus paying off your existing debt. Of course, this assumes you buy with an investment mindset and don't have any catastrophic issues that cause you to lose the house, but it you plan your life assuming catastrophe, you will never get anywhere.

It is a more conservative approach to pay down your existing uncollateralized debt before buying a house, but financial conservatism runs inverse to growth.

FINate

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Re: What to do with inheritance?
« Reply #17 on: May 05, 2018, 01:54:36 PM »
You were 26 about 7 years ago, or around 2011, which was a great time to buy RE. I was encouraging family/friends to purchase back then and it's when we purchased investment property. The huge run-up in prices since is good for us but bad for new entrants. Mortgaged RE is leveraged, so it pays off big if prices go in your favor, but can be devastating if they go flat or negative.

EDIT: Also, my primary residence in a HCOL area has doubled in value since purchase about 15 years ago...which pens out to about 3.5% annualized return before taxes/expenses are factored in. Last I checked, after expenses it more-or-less has tracked inflation. I would have been better off putting my money into investments, but have to live somewhere and ended up being favorable compared to rent. A primary residence is not an investment, it's a place to live. Buy a house if you can truly afford it, are ready to put down roots and commit to a property for 10+ years, and you want to lock in cost of living for the long term.
« Last Edit: May 05, 2018, 02:01:00 PM by FINate »

FatFI2025

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Re: What to do with inheritance?
« Reply #18 on: May 05, 2018, 03:05:21 PM »
You were 26 about 7 years ago, or around 2011, which was a great time to buy RE. I was encouraging family/friends to purchase back then and it's when we purchased investment property. The huge run-up in prices since is good for us but bad for new entrants. Mortgaged RE is leveraged, so it pays off big if prices go in your favor, but can be devastating if they go flat or negative.

EDIT: Also, my primary residence in a HCOL area has doubled in value since purchase about 15 years ago...which pens out to about 3.5% annualized return before taxes/expenses are factored in. Last I checked, after expenses it more-or-less has tracked inflation. I would have been better off putting my money into investments, but have to live somewhere and ended up being favorable compared to rent. A primary residence is not an investment, it's a place to live. Buy a house if you can truly afford it, are ready to put down roots and commit to a property for 10+ years, and you want to lock in cost of living for the long term.

Yes definitely true that leverage will magnify a loss, so it increases risk. And I also agree that past performance is no guarantee of future returns so I wouldn't anticipate a 20% ROI over the next ten years. Even projecting appreciation at inflation, numbers will favor a purchase vs rent over a 10 year period. I guess where I would respectfully disagree is that I think a wisely purchased primary residence can be a smart investment if you buy with an investor mindset, especially if you're young and are willing to tolerate roommates.