Author Topic: What to do w/small inheritance?  (Read 2771 times)

mrigney

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What to do w/small inheritance?
« on: May 30, 2013, 07:32:39 AM »
Thought I'd get the MMM community's advice. My wife and I will be receiving a small ($6k) inheritance from my grandparent's estate in the next month or so once all estate business is finalized. Here is our current situation:

Age: 28/27
Take Home Pay: ~$3900/month
Savings Rate (just started tracking this): 26%

Assets:
House: ~$160k
401k/403b: $13k (spent a year working for an employer w/o benefits. Just took a new job and started contributing again. Contributing up to the employer match (I contribute 6%, employer matches 3%).
College 529 plan: $5100 (daughter just turned 2...planning on a second w/in the next year)
Liquid Assets: ~$7k (~$6k is earmarked as "savings". We originally thought we would be moving to a new house and were going to use this as part of a downpayment. We're staying in our house, though, so not sure what we'll do w/that money now).
Cars: 2009 Hyundai Sonata, 1996 Nissan Maxima

Liabilities:
Mortgage: $150k
Student Loans: $11k (2.5% interest)

So if you were being gifted $6k, what would you do with it? Seems foolish to pay down the student loans since they're at 2.5%. We'll probably take about $400 and use it to get a few things that we've been needing (ok, wanting) around the house. I'll complete my garage gym w/it, my wife will probably use it to improve the garden. We were thinking of putting $1k into the 529 (seems like something my grandparents would've been on board with). Then, with the remaining $4500, we were thinking of maybe earmarking $1500 towards a new car (we don't have anything saved for one right now, and with my Maxima at 17 years old and 180k miles w/some minor electrical issues, it's only a matter of time). Then, take the other $3000 and open up a Vanguard account.

Other ideas or recommendations? If we take the $3k and open up a Vanguard, should we open it up as a Roth IRA? A taxable account? Something else? This is really the first time we'll have had money to invest outside of a 401k/403b. Any help appreciated!

aj_yooper

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Re: What to do w/small inheritance?
« Reply #1 on: May 30, 2013, 09:02:13 AM »
If you have $10k in equity($160-$150), you probably are paying a PMI fee, which can be a significant cost to you.  Take a look at your mortgage documents and see what the costs are.  The PMI could be a really big silent sucker on your budget.  If you don't have PMI, great.

What is your mortgage interest rate and what payment year are you on?  Take a look at your amortization schedule for your loan and find out where you are on the payments.  In years 1-5, if you were to prepay about $6K on your principal, which moves you up on the principal payback amortization schedule, you will save over $11k on your interest payments.  Sounds unbelievable, just add up the amounts.  The trick is, if you prepay on the principal, continue with your monthly payments as if you did not make the pre-payments to principal.  Your payments will remain the same and it will not feel any different, but when you get your home mortgage interest statement in January, it will reflect the decreased interest charges.  If you pay a little over $6k in years 6-7, you will save over $10k.  The savings will show up in your mortgage account and are tax free.  Around year 13, the prepayments are about a match to your interest savings, which, I think, is still a big deal.  I think the savings in interest expense or PMI in the mortgage early years are a good place to put cash now. 

I would not do the college savings fund, but would put the money in a Roth IRA.  Financial aid officers look at family savings for college and reduce their financial aid to the students accordingly.   Roths are flexible and tax advantaged for you; compounding interest there at your early ages will be tremendously beneficial to your family finances.

Sweet Betsy

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Re: What to do w/small inheritance?
« Reply #2 on: May 30, 2013, 11:58:53 AM »
Put the inheritance into your emergency fund (along with the $7000 you have in savings).  You don't have nearly enough set aside to cover you if you have a major home repair, medical emergency or job loss.  If it makes you feel better you could put part of it into an ibond and make a bit more in interest. 

If you absolutely can't stand the idea of having a robust emergency fund...throw it at your student loans or your mortgage.   You aren't ready to start investing you need to get your non mortgage debt taken care of and your emergency fund fully funded. 

mrigney

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Re: What to do w/small inheritance?
« Reply #3 on: May 30, 2013, 12:14:49 PM »
Betsy, not to be contrarian, and I know I did ask for advice, but $6k in cash + credit cards + ~$1k in positive cash flow/month should cover most anything (especially in a <4 year old house that we have owned since it was built). We can meet all of our deductibles easily, I'm in a stable job....what good would having $13k sitting in cash at this point do for me? That's a lot of employees sitting idle. In addition, w/the student loans (despite them being debt) at 2.5% fixed, it makes less sense to pay extra on them (from an investing standpoint) than it does to pay down your mortgage early, and paying down mortgage early is (generally) frowned upon here if interest rates are <= 4%.

So, it's not that I can't stand the idea of a robust emergency fund...I just don't see the need to prioritize the emergency fund beyond the $6k in cash I have sitting around doing nothing. I feel perfectly secure building that up a little bit over the next year or two, but I don't really want more than $10k in cash at any point in life. If I invest the $6k inheritance in a Roth IRA, I can always pull out my contributions w/no penalty or taxes in a true emergency.

Am I missing something? 

Dynasty

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Re: What to do w/small inheritance?
« Reply #4 on: May 30, 2013, 12:17:53 PM »
Immediately put half in long term investments.

Sit on the rest for six months or a year and reevaluate at that time.