What to do with my inheritance?

Question

I received an inheritance of 120K. So far I paid off our second mortgage. I also paid off all credit card debt. I have 80K left. This is the biggest payout we will likely ever receive. My husband works full time and earns a modest salary. We aren't low income but we are just scraping by. I am a grad student and not earning any income currently. I am acquiring student loans. I owe 16k in loans currently and will owe about 45K total when finished. I will get a decent job when I am done. My husband and I are 46 and we have 2 kids, ages 11 & 7. I want to get my older son into a private middle school for 2 years. They have a hardy endowment and may offer us a decent need based scholarship if we look worthy on paper. I don't know how inheritance will look to them, and I want to make decisions that will best support getting generous aid from them.

We still owe 238k on our 30 year mortgage. I am tempted to switch to a 15 year mortgage and just try to pay if off as quickly as possible. At the same time, our house is a major fixer. It needs a lot of expensive work to just become an average house. It's not a great place to live and I don't think we can afford anything better in our area. We also want to start a college fund for the kids. We have a modest retirement set up, with husband paying to meet maximum matching.

Should I use the money to pay off student loans and future grad expenses for me? Should I put money into fixing the house or just try to make payemtns to own it outright in 15 years? What would you recommend in light of trying to improve our chances of making 2 years of private middle school attainable for our son? Thanks!

Answer 1

Should I use the money to pay off student loans and future grad expenses for me?

Yes. The main drawback to student loans is that they cannot be gotten rid of except by paying them off (other than extreme circumstances such as death or complete disability). A mortgage, car loan, or other collateralized loans can be dealt with by selling the underlying collateral. Credit card loans can be discharged in bankruptcy.

Stop borrowing for college, pay for it in cash, then decide what to do with the rest. Make sure you have a comfortable amount saved for emergencies in a completely liquid account (not a retirement account or CDs), and continue to pay off with the rest. You might also consider putting some away for your kids' college, so

I want to get my older son into a private middle school for 2 years. They have a hardy endowment and may offer us a decent need based scholarship if we look worthy on paper

I have a hard time getting behind this plan with a 238K mortgage. If you want to apply for scholarships that's great - but don't finagle your finances to look like you're poor when you have a quarter-million-dollar house. If you want to save some for private school then do that out of what you have. Otherwise either rearrange your priorities so you can afford it or private school might not be in the cards for you.

That said- while it was a blessing to be able to pay off the second mortgage and credit cards, your hesitancy to pay off the student loans makes me wonder if you will start living within your means after the loans are paid off. My concern is that your current spending levels that got you in this much debt in the first place will put you back in debt in the near future, and you won't have another inheritance to help pull you out.

I know that wasn't your question, but I felt like I needed to add that to my answer as well.

Answer 2

My general "rule of thumb" is that if the debt money costs you more than your savings make, then you should pay it off. In nearly every case debt is more expensive than the tiny amounts you can get in savings interest, so in almost all cases, pay off debts whenever you can.

In the UK, when student loans were first introduced the interest rate was the same as the inflation rate. At the time, a regular bank savings account would pay a percent or two above inflation, and so in such a case, you were better off taking the loan than you were paying for it in cash.

These days it's different, and I think considerably more expensive to take the loan than pay in cash - especially if you look over the likely time it'll take to pay it off. Since you have the cash, you should therefore use it instead of the loan. You've already done this with credit cards (which are typically by-far the most expensive way to borrow money) - this is the same principle, although maybe not quite such a contrast.

Mortgage debt is much the same, although most people have no possible way to pay off any meaningful amount of their mortgage. Thus, this sort of debt is often considered a "cost of living". When it comes to mortgage debt, I'd make a judgement call of how much the monthly comes down versus how useful the money would be "just in case".

There is an element of your own personal style here. Personally I'm a saver - I don't really spend money I haven't already saved up (and so having a bit of money in a savings account is actually comforting to me). Other people see money and just go spend it right away - if that's you, then you're probably best off paying off all the debt you can because you're probably going to need to borrow more money in the future (so as well to have "space" for that new debt).

Since you asked about numerous possible future projects... If you pay off lots of your debts, you'll have more "spare" money each month. If you're disciplined, you could start saving that newly-freed up money and put it towards the things you're aiming at.

In however-many-years, you still might not have enough money to pay for private education, but you'd have a good amount to (say) pay for some tuition or after-school activities or whatever - not the same as a private education, but maybe gives your kids an advantage over the other kids that don't have this.

Lastly, fixing up your house is also a matter of personal style. Some people want it all done right away. Other people can live with and get to it gradually. If you're the latter, then again, take that newly "spare" money and put some amount of it towards fixing up the house. When you have enough to do one of the jobs that needs doing - do it. Then save up again for the next. Sure, it'll take you some years to get to it all - but by the time the kids are at college (or graduate?) you may be sitting in a house worth $500K instead of $250K. That being the case, you may be in a position to "downsize", freeing up money which you could then use to help your kids with their debts (you may be able to do this without fixing up the house, but generally houses are worth more when they have less outstanding work to do on them).