10

Let's say you get a $10k windfall. How do you determine what is the best thing to spend it on?

  • We need a new roof.
  • Our mortgage is moderately underwater but not in bad shape and we are content where we are.
  • We make $550 in monthly car payments--owe about $25000 for 2 cars.
  • I have an education loan of about $10k to pay off.
  • No credit card debt.
  • We are paying what we can to 401k but only about 5% of income (we are in our early 30s)
  • We have an emergency fund but it is small at this point.

Part will get spent on something fun. But the rest--new roof? Pay it right to mortgage? Pay off a car? Stock market?

  • Timeline on the new roof? this year? in next 5 years? What is the interest rate on the car loans and the student loan? – Chuck van der Linden Jun 17 '11 at 20:24
  • Last time I bought a new roof it was over $40,000 though insurance paid 98% due to it being wind damage. What will yours cost? – AbraCadaver Sep 23 '15 at 17:24
5

I think you've got competition on that list for where to put the money - I'd work out which option is costing me the most currently or will cost me the most in the future and take care of it.

I'd be willing to bet that Eric is right, though, that it will need to be the roof. Not fixing it could cost you more in the long run than any of the other items on the list (assuming your circumstances remain roughly the same).

General comments/other considerations:

  • Interest on education loan tends to be quite low, so not worth targeting
  • Not enough to top up the 401K given everything else you have going on
  • I'd ignore the car payments, unless you're getting nailed with a bad interest rate; if that were the case, it might warrant a closer look.

Any money that doesn't get spent on the roof (if any) - I would put in a rainy day fund.

  • Thanks! That sounds right. We had figured that the roof was priority one. – Don Jun 17 '11 at 16:53
  • Not very sexy, is it - "fix the roof"? Not in the same league as flying to Vegas and blowing the lot on the tables. But living in a dry environment is quite nice. – gef05 Jun 17 '11 at 16:59
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    It was basically between new roof and paying off the minivan. Sexy is not an option :) – Don Jun 17 '11 at 17:01
  • Think of your roof as a debt that isn't due yet. Get it fixed, then get your house re-appraised. – Andrew Lewis Jun 17 '11 at 18:30
6

I've been listening to Dave Ramsey a lot lately, and he encourages (encourage might be too light of a word for him) this priority list for budgeting:

  1. Make sure you can make minimum payments on all obligations.
  2. $1000 emergency fund
  3. Extra payments to debt (everything but mortgage) from smallest to largest (in rare conditions, serious bills first, like IRS, no matter the size).
  4. Savings — 3-6 months of expenses

I would strongly advise you to tackle this list before you start to think about any sizable "fun" spending. If you don't have #1, set that aside first.

The options you mentioned:

  • New roof: You should ask yourself "what is the potential cost of not getting a new roof?" If you can save up for it a little at a time, while putting most of the rest of your money to paying off debt, that's what I would do. Unless, of course, there is damage or risk of damage to your house by not doing it now.

    Then, you need to do the same measurement (of doing the roof now) against the goal of saving three to six months of expenses. Especially in your case, with your mortgage underwater, you want to be sure you are prepared should anything happen (for example, losing a job, and potentially being forced to move for a new job).

  • Cars/student loan: (Refer to #3 above — in other words, yes).

  • Mortgage: Dave Ramsey typically doesn't advocate extra payments to house until the list above is taken care of, and you are saving more toward retirement and college funds for children.
  • Stock market: I would definitely not invest it before your debt is paid off. That would essentially be using your debt as leverage, which is a strategic, risky move. Since you don't seem to have any investing goals in mind, it doesn't sound right for you at this time.
  • Fun: Save for last. I would encourage you to budget in some fun to your normal budget (as possible) to stay happy, but certainly wouldn't advise to use a major portion of a windfall for it, while several items on the list are still outstanding.
  • 2
    good advice, I would change one thing, pay down debts not according to the size of the debt, but the interest rate you are paying. Paying off a debt is pretty much equivalent to investing the money at the interest rate of the debt. – Chuck van der Linden Jun 17 '11 at 20:28
  • @Chuck That makes mathematical sense, but Dave Ramsey is very clear about his advice in this area - smallest to largest. This has led to articles such as Dave Ramsey is bad at math and its follow-up Dave Ramsey is good at psychology. Some great quotes there, such as this: "Personal finance is 80% behavior and 20% head knowledge... If you go on a diet and the first week you lose a few pounds, you think, great I can do this, this works." – Nicole Jun 17 '11 at 20:45
  • @Chuck I will add, thanks for bringing that up - it's up to the borrower to decide what works for their situation, and the more knowledge they are given, the better informed their decision will be. Personally I use a little bit of a mixed approach, but as far as general advice goes, I like Dave's take on this, and I just wanted you to be aware of the reason I repeated it here. – Nicole Jun 17 '11 at 20:48
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    Dave's advice is great for those who benefit from it. His least endearing attribute is the lack of flexibility. He speaks in the absolutes more typical of a religious preacher than someone who might be talking to people of different backgrounds. While I admit that most people are best served to avoid credit cards, his claim that no mortal man can use a card to his benefit is a bit over the top. Oh, and joetaxpayer.com/dave-ramsey-scares-me a lot. – JTP - Apologise to Monica Jun 17 '11 at 22:11
2

As much as I'd like to tell you to save some for an emergency fund or use it to pay off some debt, if you really need a new roof you should get that taken care of first.

  • That makes sense. I just wasn't sure if I might be able to finance through a roofer for less than I'm financing my cars. Or am I being optimistic about roofing co financing? – Don Jun 17 '11 at 16:35
  • @Don forget financing. Start paying cash for everything and you'll be better off. I agree with Eric that shelter is one of those necessities in life. So new roof would be my first priority. I'd also suggest you stop adding money to your 401k and instead pay off some debt. You'll be much better in the long run to completely eliminate debt from your life. – mpenrow Jun 17 '11 at 16:49
  • We have recently switched to all cash and are loving it. We keep the cards only for gas (so the wife doesn't have to go in to pay when the kids are in the car). – Don Jun 17 '11 at 16:51
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    @mpenrow I think that debt versus retirement is a place where reasonable people can disagree, but probably deserves its own question. One point is that tax advantaged savings has a contribution cap per year, so if you don't take advantage of it, its gone. There is also a good argument for reducing your consumer debt. How much to divert from retirement depends a lot on the interest rate of that debt. – KeithB Jun 17 '11 at 17:54
  • @KeithB +1 agreed. I just know from my experience having no debt gives me all kinds of options. From a strictly % return perspective the retirement savings might be better. But I love the freedom of no debt. – mpenrow Jun 17 '11 at 18:00
1

If you need a new roof because your house is full of buckets that fill up every rain :) then that's most likely the item at the top of the list. If you need a new roof because you don't like the color, I'd do something else with it.

If you are in the US and the 'education loan' has the same caveats attached as your average student loan, I would eye that one with intent if the roof can soldier on for a few years as is. The simple reason for this is that a student loan would be the one debt that you list that you can never get rid off unless you actually pay it off, no matter what happens (IOW student loans aren't bankruptable). Disregard this if the caveats in the first sentence don't apply...

1

I recommend fixing the roof.

You're going to pay for it eventually, either as an emergency repair or a concession at sale.

0

Hard to give an answer without knowing more details (interest rates, remaining principle on loans, especially how soon the new roof is needed). Maintaining the value in your home (unless you are planning to walk away from it or short-sell or something) is of paramount importance, and the cost of a leak should it happen can be substantial.

If the roof is a few years out, and you have loans with interest rates about oh I'd say around 6%or more then I would pay off those loans and take the money you were paying there and start putting it into a fund to pay for the roof.

I am also a huge fan of doing whatever you can to max out your 401K contributions. Money put into a 401K early has a LOT more value than money put in later, and since you don't pay taxes on it, the cost out of your pocket is much lower (eg. at a 20% tax rate it costs you only $80 out of pocket to put $100 into your 401.. (look at that, you just made like 25% return on that $80)

Paying off loans is pretty much equivalent to making a risk free return on the money equal to the interest rate on the loan. But to REALLY make that work, what you need to do is in a virtual sense, keep making the loan payment just now pay it to yourself, putting that money into a savings account, or towards your 401K or whatever. If you just torn around and start spending that money, then you are not really getting as much value to paying off the loan early.

  • I don't think the roof can handle another rainy season (which where I live is just in the winter luckily). So I think chalk up another one in the roof column. – Don Jun 17 '11 at 22:23
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Have you looked at DIY roof repair? Caulking with tar adhesive, and shingle replacement isn't that hard, if you're in good health. Totally depends on how bad your roof is/what the demands on it are going to be.

If you can squeak another year out of it, with minimal investment, you'll have a year's worth of, say car-debt (at what percent interest?) to put into your roof fund.

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