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This question already has an answer here:

My grandma left a 50K inheritance and I'm looking for advice about the best way to use it. My husband and I have 3 kids (11, 3, 1) and are in our early 30s.

We have:

  • 60K in student loan debt
  • 15K car loan
  • pay 1300/month in rent and utilities
  • have about 5K in other debt

and make about 2K/month and own nothing.

One good thing is that my husband is in grad school and will be done in 2019 and will then make about 75K/yr with his degree profession.

In the meantime, we're living paycheck to paycheck and I don't know what to do with the 50K I have inherited (I don't want to squander it).

BTW, we can't buy anything just yet because our credit scores are about 550! Any advice would be appreciated.

I live in California.

marked as duplicate by MD-Tech, Nathan L, JoeTaxpayer united-states Oct 26 '16 at 17:47

This question has been asked before and already has an answer. If those answers do not fully address your question, please ask a new question.

  • How on earth did you qualify for a 15K car loan? – Wesley Marshall Oct 27 '16 at 4:12
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The basic optimization rule on distributing windfalls toward debt is to pay off the highest interest rate debt first putting any extra money into that debt while making minimum payments to the other creditors.

If the 5k in "other debt" is credit card debt it is virtually certain to be the highest interest rate debt. Pay it off immediately. Don't wait for the next statement. Once you are paying on credit cards there is no grace period and the sooner you pay it the less interest you will accrue.

Second, keep 10k for emergencies but pretend you don't have it. Keep your spending as close as possible to what it is now.

Check the interest rate on the auto loan v student loans. If the auto loan is materially higher pay it off, then pay the remaining 20k toward the student loans.

Added this comment about credit with a view towards the OP's future:

Something to consider for the longer term is getting your credit situation set up so that should you want to buy a new car or a home a few years down the road you will be paying the lowest possible interest.

You can jump start your credit by taking out one or two secured credit cards from one of the banks that will, in a few years, unsecure your account, return your deposit, and leave no trace you ever opened a secured account. That's the route I took with Citi and Wells Fargo. While over spending on credit cards can be tempting, they are, with a solid payment history, the single most important positive attribute on a credit report and impact FICO scores more than other type of credit or debt. So make an absolute practice of only using them for things you would buy anyway and always, always, pay each monthly bill in full.

This one thing will make it far easier to find a good rental, buy a car on the best terms, or get a mortgage at good rates.

And remember: Credit is not equal to debt. Maximize the former and minimize the latter.

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    After paying off the credit card debt, the safest bet would be to pay off as much of the student loan debt as possible. In a real emergency, everything else can be written off in bankruptcy, but student loan debt can't and is therefore highest-risk. – R.. Oct 26 '16 at 0:44
  • I concur with the emergency fund. Also, once you pay off a debt, keep making the monthly payments -- either into your emergency fund, or a savings account. – Codes with Hammer Oct 26 '16 at 13:08
  • What about the last 15k???? – Anoplexian Oct 26 '16 at 14:22
  • @Anoplexian If the auto loan is materially higher pay it off – Myles Oct 26 '16 at 15:03
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    @R.. As you point out, student loans do bring up complicated issues. While they can't be included in bk, they can be more flexible than other loans when one is financially stressed. Unlike other loans payments can be reduced or deferred under certain circumstances. Another advantage of student loans is the availability of income tax deductions for interest paid. This is similar to mortgage loans but isn't generally available. So, whether, and how much, to pay down the student loans depends a great deal on one's personal situation. – doug Oct 26 '16 at 15:27
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My grandma left a 50K inheritance

You don't make clear where in the inheritance process you are. I actually know of one case where the executor (a family member, not a professional) distributed the inheritance before paying the estate taxes. Long story short, the heirs had to pay back part of the inheritance. So the first thing that I would do is verify that the estate is closed and all the taxes paid. If the executor is a professional, just call and ask. If a family member, you may want to approach it more obliquely. Or not.

The important thing is not to start spending that money until you're sure that you have it.

One good thing is that my husband is in grad school and will be done in 2019 and will then make about 75K/yr with his degree profession.

Be a bit careful about relying on this. Outside the student loans, you should build other expenses around the assumption that he won't find a job immediately after grad school. For example, we could be in a recession in 2019. We'll be about due by then.

Paying off the $5k "other debt" is probably a no brainer. Chances are that you're paying double-digit interest. Just kill it.

Unless the car loan is zero-interest, you probably want to get rid of that loan too. I would tend to agree that the car seems expensive for your income, but I'm not sure that the amount that you could recover by selling it justifies the loss of value. Hopefully it's in good shape and will last for years without significant maintenance.

Consider putting $2k (your monthly income) in your checking account. Instead of paying for things paycheck-to-paycheck, this should allow you to buy things on schedule, without having to wait for the money to appear in your account.

Put the remainder into an emergency account. Set aside $12k (50% of your annual income/expenses) for real emergencies like a medical emergency or job loss. The other $16k you can use the same way you use the $5k other debt borrowing now, for small emergencies. E.g. a car repair.

Make a budget and stick to it. The elimination of the car loan should free up enough monthly income to support a reasonable budget. If it seems like it isn't, then you are spending too much money for your income. Don't forget to explicitly budget for entertainment and vacations. It's easy to overspend there.

If you don't make a budget, you'll just find yourself back to your paycheck-to-paycheck existence. That sounds like it is frustrating for you. Budget so that you know how much money you really need to live.

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First, don't borrow any more money. You're probably bankrupt right now at that income level. 2k/month is poverty level income, especially in some of the higher cost of living areas of California. At $2k per month of income, and $1300 of rent and utilities, you've only got 700 a month for food.

The student loans are probably in deferment while your husband is in school. If so, keep them that way and deal with them when he lands a career track goal after grad school.

The car loan is more than you can afford. Seriously consider selling the car to get rid of the note. Then use the cash flow that was going to the car loan to pay off the 'other' debt. A car is usually a luxury, but if it is necessary, be sure it is one that doesn't include a loan.

Budget all of your income (consider using YNAB or something like it). Include a budget item to build an emergency fund. Live within your means and look for ways to supplement your income. With three of your own, you'd probably make an excellent baby sitter.

As for the inheritance, find a low risk, liquid investment, such as 12 month CDs or savings bonds. Something that you can liquidate without penalty if an emergency arises. Save the money for if you get into a situation where there is no other way out. Hopefully you can have your emergency fund built up so that you don't need to draw on the inheritance.

Set a date, grad school + landing + 90 days. If you reach that date and haven't had to use the inheritance, and you have a good emergency fund, put the inheritance in a retirement fund and forget about it.

Why retirement fund and not a college fund for the kids? The best gift you can give them is to remain financially independent throughout your life. If you get to the point where you are fully funding your tax advantaged retirement savings, and you are ready to start wealth-building, that is the time to take part of that cash flow and set it aside for college funds.

  • Even US savings bonds have an illiquid period, and all CDs (as far as I know) have an early redemption penalty. The best place for the emergency fund is a savings account or money market account. – Codes with Hammer Oct 26 '16 at 13:10
  • +1 for "don't borrow any more money," for "selling the car," for "budget all of your income," and for "emergency fund." – Ben Miller Oct 26 '16 at 15:35
  • @CodeswithHammer the emergency fund would likely not be used all at once. You could stagger the setup, with a chunk in money market, a chunk in CDs, and a chunk in savings bonds. – Xalorous Oct 26 '16 at 15:36
  • @CodeswithHammer Using CDs, unless I misunderstand completely, you maintain liquidity and can withdraw your initial deposit, but you lose any interest if you withdraw early. In an emergency, losing $50 bucks to access $1000 is acceptable to me. Especially since the other CDs are still there earning interest. The bigger the emergency, the less important the lost interest would be. Same thing for bonds, though they're basically insolvent for the first year, and the penalty is 3 months of interest. – Xalorous Oct 26 '16 at 15:52
  • @Xalorous, laddering the CDs is a good idea, and would address my liquidity concern. – Codes with Hammer Oct 26 '16 at 16:04
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**I would encourage you to clear all your debts and remain debt free, then you can consult a financial manager-for investing purposes that fits your needs and goals. There are so many investment vehicles out, but the best of all is in real estate which requires lots of money.

For your case I would prefer money market funds. If don't have time for a specialist you just walk into any stock broker and invest in those shares from well established companies with strong fundamentals. Buy them when undervalued but with long term goals. Ask the stock broker about bonds and other ways that the government purposes for domestic borrowings. Etc.

  • You'd be better off finding a 1% APY savings account at current rates. Money market accounts are no longer what they used to be. – Roy Tinker May 6 '17 at 4:58

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