What should be done with our inheritance?
My wife is receiving 70,000. We have to set aside 20,000 for taxes on the money, so her money is really 50,000.
We have approx. 26,000 in credit card and student loan debt. The student loan has been in forbearance for 2 years because we couldn’t afford to pay. We owe 120,000 on our house and just scrape by every week. I think we should pay off the 26,000. My wifes sister said it would look better on our credit report if we made payments on the college loans vs paying the debt off. That sounds nutty to me.Also, what would be a smart financial move for us with this money so we don’t scrape by anymore. Were scared we might blow this opportunity. If we pay off the 26,000 what should we do with the rest?
Thanks.
1. an inheritance is not income subject to income tax [at least in the US]. Estate taxes, if any, are paid the administrator before your wife receives anything … she should ask the administrator for a estimate of the amount she’ll actually receive.
2. you need a comprehensive financial plan for the rest of your lives. most of the questions do not have useful answers without such a plan.
3. paying off credit cards is useful, IF (and only if) you thereafter pay them off in FULL every month. NO MORE continuing balances — they cause you to pay interest on every purchase you make with the card. That’s bad — it is also expensive.
set aside a small amount in savings, say 5k max, so that you can always pay off the credit cards in full. What you need to do is put enough in every month [the amounts you are paying now] and then take out only enough to pay this month’s charges — the account will go up and down, AND your goal is for it to even out (come back to 5k) once every year.
4. it would then be prudent and honest to get the student loans current. however, student loans are usually quite cheap [by comparison with other debts] and so I’d think about only bringing them to current status. and then made the usual payment every month thereafter.
5. Getting ahead is difficult [we've been there]. unfortunately, paying down your mortgage does not reduce the size of the payments in future periods — it only reduces the number of future payments and only the last ones at that.
Thus, after you’ll cut all interest payments to other debts [still thinking about paying off the student loan], you’ll want to be looking to learn a bit about investing — having your remaining money make money that can be used to make that payment for you.
6. keeping your expenditures down needs to continue. Lottery winners regularly become broke again within five years because they can’t control their spending. You need to avoid that trap.
GL
