What to do with $50k inheritance?

[trustmrtwo]

I'm getting a $50k inheritance from my grandparents who recently passed.

However, I'm not really sure what to do with the money.

My wife and I have:
$25k car loan (debt)
$10k in business debt that we are personally liable for (debt)
Only $20k combined in retirement (we're 30 years old). To me, at this time, it seems like not nearly enough.
-Do not own a house but want to.
-Budget and have a decently comfortable emergency fund (2 months of ALL expenses).

So, question is, what to do with the money?

1. Invest all $50k in various retirement accounts

2. Pay off debts and save the rest to buy a house or bolster our emergency fund

3. Use all $50k as a downpayment for a house

So, what would you do and why?

[CheapScholar]

Hard to say without knowing the rate on the car loan, rate on your business debt, and estimation of how much a home costs in your area.  Also, are you 90% sure you'd stay in the home for at least 5 years?  Or are you in an industry that might take you some place else?

Are kids in the picture?  Do you need the space a home could offer, or do you just want more privacy?

[SavinMaven]

Not sure this is the 'right' answer but here's what I would do:

1) pay off both debts. Instant return on the money, and you can wipe the slate clean. The caveat is that you MUST not take on new debt as then you would have wasted your inheritance! The risk of being debt-free is that you might rationalize a bigger car than you can afford, a better vacation, etc.... but for some being debt-free can be liberating, so long as you are committed to staying out of all debt except a reasonable mortgage.

2) put the other 15k in your emergency fund. Supposedly loan officers look for "3-6 months" reserve funds when approving a mortgage and selecting your interest rate (a.k.a. risk of default). And houses can surprise you... they need sudden repairs that your current emergency fund doesn't plan for as a non-homeowner.

3) Find line items to cut out of the budget to ratchet up saving for the down payment.

Good luck!

[surfhb]

Why are you 30 years old with a smallish  EF and only 20k in the banks with a $25K car loan?   ;)   Whats your income, expenses and savings rate? 

Sell the car and buy something cheaper, pay off all debt,  bolster the EF and put the rest in the bank for the future home. 

[trustmrtwo]

Hard to say without knowing the rate on the car loan, rate on your business debt, and estimation of how much a home costs in your area.  Also, are you 90% sure you'd stay in the home for at least 5 years?  Or are you in an industry that might take you some place else?

Are kids in the picture?  Do you need the space a home could offer, or do you just want more privacy?

Car loan interest rate is .09 % APR so it's "cheap money".

Business loan is 8% interest rate, killing us basically. I know we'll pay this off first no matter what.

Yes, we had one kid, plan to have more.

Yes, we'd like to buy a house and live in it for 5+ years (most likely 10+ years). I work remote so I'll never have to move thankfully, unless something happens, which it very well could, like the company being sold etc.

Housing is freaking ridiculous in my area. We'd need to plunk down $350k for a decent house that still needs work. So, I guess we can keep renting, currently paying $1600/mo for a house that we love in a good area. Buying would be very similar in terms of a monthly payment.

Thanks for the questions! Gets me thinking.

[trustmrtwo]

Not sure this is the 'right' answer but here's what I would do:

1) pay off both debts. Instant return on the money, and you can wipe the slate clean. The caveat is that you MUST not take on new debt as then you would have wasted your inheritance! The risk of being debt-free is that you might rationalize a bigger car than you can afford, a better vacation, etc.... but for some being debt-free can be liberating, so long as you are committed to staying out of all debt except a reasonable mortgage.

2) put the other 15k in your emergency fund. Supposedly loan officers look for "3-6 months" reserve funds when approving a mortgage and selecting your interest rate (a.k.a. risk of default). And houses can surprise you... they need sudden repairs that your current emergency fund doesn't plan for as a non-homeowner.

3) Find line items to cut out of the budget to ratchet up saving for the down payment.

Good luck!

Sounds really sensible, this is what I was thinking too, but wanted to get other's opinions.

Paying off debt first is the priority. We will not go into debt again unless we buy a house. We are already saving for our next car and we just bought this new one.

The good thing about our situation is that we only have 1 car since I work from home, and my wife could walk to her job.

I'm also considering keeping the car loan, over the course of the loan, we are only paying about $1,800 in interest. Yes, $2k in interest is still a lot of money, but if we could invest the money we would have paid toward the car, and can get a higher % return, it might be worth it... at least that's what I'm telling myself.

Put the $25k (or part of it) into a Roth IRA for both my wife and myself, thats most likely $10-$11k we can invest and pull out the principal when it comes time to buy a house.

[Milizard]

An inheritance should be saved and invested/kept in tact as much as possible, IMO, especially at such a young age when you're just beginning your stash.

[checkedoutat39]

Pay the debts off. Drop collision insurance on the car and/or raise deductibles now that you have $15K on hand if something goes wrong. If desired, put the $15K into a stock or bond fund depending on your risk tolerance. Maybe use it to make Roth IRA contributions. Direct funds that would otherwise go to debt service into building emergency/retirement stashe.

[DarthCreationist]

Definitely I would not choose the last option and buy a house in this situation or comparable (actually I have, but that was before I found this and similar communities). I would either invest the money or pay off the debts. Depends on the interest rates. If your interest rates is say below 3% and you can pay off your debt slowly, it might be better to invest.

[CheapScholar]

Have to ask, why do you have a +25K car when you work from home and your wife can "walk to work"?  Do you need a very reliable and safe car to visit family or something?  Even if so, your car is worth more than you can afford by most measures, especially around here on MMM.

I'd sell that car and get something cheap.  Better yet, could you have a "carless" summer and avoid car payments and auto insurance for a few months?  Just thinking out loud.  Anyway, I'd get a cheaper car, pay off this 8% business loan, throw a few grand of this inheritance in retirement acts, and figure out how to get 20% down payment on a home.  But, that's just me, I like owning my own home.

[Goldielocks]

Put the money into a separate investment, (savings account) create a paper trail.

Then "loan" the money to your wife, for a prescribed interest rate of interest, (above the federal rate), and write it up on paper.  Have it come due in 10 years.

Your wife then uses the money to pay off the debt, and pays you the interest each year.   Then she pays it off in full out of household funds.

The idea is to preserve it for when you want to buy something substantial, but the debt rate is high, or want to keep it out of joint household assets.

[Bicycle_B]

Great remarks by all!

Seconding the idea not to buy a house.  It sounds like in your area, buying a house at all is probably unwise.  They come with many costs beyond just Principal and Interest.  Your focus should be on establishing a good savings rate first.  IMHO, don't buy unless you can do all of the following:
1. Have no debt besides the mortgage
2. Show a significant savings rate separate from paying down the mortgage
3. Show that the expected return on investment is higher from the house than the stock market, assuming that house values in your area stop rising.  (Hint: this is very difficult in areas with expensive housing.  Usually a purchase is very safe in cheap cities, risky/inefficient in expensive ones.)

For inspiration, here's a link to a couple who became wealthy by renting an apartment instead of a house (says it on the very first page). 
http://www.gocurrycracker.com/start-here/

[trustmrtwo]

Great remarks by all!

Seconding the idea not to buy a house.  It sounds like in your area, buying a house at all is probably unwise.  They come with many costs beyond just Principal and Interest.  Your focus should be on establishing a good savings rate first.  IMHO, don't buy unless you can do all of the following:
1. Have no debt besides the mortgage
2. Show a significant savings rate separate from paying down the mortgage
3. Show that the expected return on investment is higher from the house than the stock market, assuming that house values in your area stop rising.  (Hint: this is very difficult in areas with expensive housing.  Usually a purchase is very safe in cheap cities, risky/inefficient in expensive ones.)

For inspiration, here's a link to a couple who became wealthy by renting an apartment instead of a house (says it on the very first page). 
http://www.gocurrycracker.com/start-here/

Great suggestions, thank you!

[TomTX]

Hard to say without knowing the rate on the car loan, rate on your business debt, and estimation of how much a home costs in your area.  Also, are you 90% sure you'd stay in the home for at least 5 years?  Or are you in an industry that might take you some place else?

Are kids in the picture?  Do you need the space a home could offer, or do you just want more privacy?

Car loan interest rate is .09 % APR so it's "cheap money".

Business loan is 8% interest rate, killing us basically. I know we'll pay this off first no matter what.

Yes, we had one kid, plan to have more.

Yes, we'd like to buy a house and live in it for 5+ years (most likely 10+ years). I work remote so I'll never have to move thankfully, unless something happens, which it very well could, like the company being sold etc.

Housing is freaking ridiculous in my area. We'd need to plunk down $350k for a decent house that still needs work. So, I guess we can keep renting, currently paying $1600/mo for a house that we love in a good area. Buying would be very similar in terms of a monthly payment.

Thanks for the questions! Gets me thinking.

If housing is unreasonable to buy (and that rent seems damn cheap) - don't buy.

And if you really want to buy, and work remotely - you can move somewhere with low housing costs.

[trustmrtwo]

Great points TomTX.

I came across this article on the Price-to-Rent ratio: http://www.investopedia.com/terms/p/price-to-rent-ratio.asp

This was also interesting, someone advocating for renting their entire life vs buying: http://www.gocurrycracker.com/renters-for-life/

The point of that article was basically you can take the 20% down you would have needed to put down on a house, invest that, and keep investing over time, and come out way ahead financially.

Why?

The author argues that stocks, mutual funds, index funds (business profits) will outgrow the appreciation of your house when you factor in Inflation.

Really interesting idea that I myself have been considering. Real estate returns are not always guaranteed.

Looks like I need to do some digging around MMM for the rent-vs-buy argument.

[better late]

Do you budget and/or track expenses? Do you know where your income goes every month? 

[TomTX]

Great points TomTX.

I came across this article on the Price-to-Rent ratio: http://www.investopedia.com/terms/p/price-to-rent-ratio.asp

This was also interesting, someone advocating for renting their entire life vs buying: http://www.gocurrycracker.com/renters-for-life/

The point of that article was basically you can take the 20% down you would have needed to put down on a house, invest that, and keep investing over time, and come out way ahead financially.

Why?

The author argues that stocks, mutual funds, index funds (business profits) will outgrow the appreciation of your house when you factor in Inflation.

Really interesting idea that I myself have been considering. Real estate returns are not always guaranteed.

Looks like I need to do some digging around MMM for the rent-vs-buy argument.

Buying a house is effing expensive as well - the process, not the house itself. It's quite the setup for those making the sale happen. You plunk down $400k. A dozen people put their hands in the pot. Seller gets $360k.*

That's like mutual fund "load" from the bad old days.


*Sure, sure. It varies and you can cut some of it out. But 10% loss/frictional cost in the transaction is quite plausible. Hard to get it below 8%. 6% for the RE agents, 1% loan origination to the mortgage company, half a dozen inspectors, 0.5-1% for title insurance, lawyer, filing fees, etc.

[JustGettingStarted1980]

I agree that your family has too much car. 25K loan with your negative net worth is just too much when you don't Have to have a car. I think carless summer is  great idea. Try Uber, Lyft, Amazon orCostco delivery services for a bit.

Sell the car, take the devaluation hit, pay off the loan, and consider  it a lesson learned until your net worth is 10 times the value of the car that you want. 

Best of Luck, JGS

[Tuskalusa]

I would go for clearing the debt and starting the emergency fund. Your grandparents gave you a lovely way to "reset" on your debt. Now you have the opportunity to make more frugal choices moving forward. Good luck! 

[pumpkinlantern]

I would go for paying off the business loan and investing the rest.  At 8% interest, the business loan is way too expensive.  I don't believe in principle that you should take your inherited money towards your consumer purchase (car) - you need to scrimp your lifestyle to pay for that!  (Plus interest rate is lower).  Of course, as others have pointed out, you could sell your car...

And I agree with others - no house.

[EnjoyIt]

1) Pay off the business loan 8% is the best return your are going to get.  This is a must.

2) You drive a car like you are already a millionaire or have a $250k/yr income.  If neither of those are the case then maybe it is best to sell off the car and buy something cheaper or really consider not having a car and walking to work while using uber whenever you need to travel anywhere. I am assuming your car expenses when you add in insurance and gas is close to $500/month. I am sure you can Uber anywhere you want for a fraction of the cost. While you don't have a car increase your emergency fund and continue investing the rest. Do it for at least 6 months.  If you feel like you still need a car, pay cash for it and never have debt again other than a mortgage.

[trustmrtwo]

Do you budget and/or track expenses? Do you know where your income goes every month?

Yes we use YNAB (highly reccomended).

[Rosy]

1. Pay off the business loan. 8% interest is indeed killing you.
2. Add one more month to your EF
3. Put the remainder in investments/retirement accounts-you are young enough that this will make a nice impact by the time you're ready to retire.

At 30 you are at a cross road - and yes, I agree with the poster who mentioned a windfall like this inheritance must be kept as intact as possible or you will be again, just where you are right now.
There is a book called: SUDDEN MONEY  - Managing a Financial Windfall by Susan Bradley, CFP - worth a look.
There can be no financial future as long as other people are getting your money - the goal is to keep and invest your income and live well below your means.

Consider moving to a low col area, if you really want a home of your own, otherwise homeownership may not make sense or even be an option.

Re-think that car loan for 25K -  sell it and buy a nice used car outright, use the difference to pay off your personal debts. It is not so much the 2K in interest that bothers me, but the money you are giving up each month - if you had that amount to put into savings each month your financial life would be on track to plan for the future.

Good luck - enjoy this windfall, but don't even consider using it to pay off personal debt.