Okay, this is totally going to look planned considering last Friday’s hypothetical on winning $100,000, but I swear this is a real question and that our friend here did not win any magical genie requests :) In fact, she got the money through the opposite of a fun situation :(
Here’s her note below, followed by my own thoughts for her to marinate on and then hopefully yours as well! We’ll call her “joy” to hopefully liven up the situation more :)
Here’s her email below… Oh, and whatever you do, Joy, do not read this post here!!
J. Money! I’ve been a long time reader of your column but, well, have never commented. Finally thought I’d send in a question at least since your advice is always sound (and fun to read)!
It’s been a year since my dad’s passing, and our inheritance has finally cleared the estate. I’m looking at a cool $100k coming my way in the next month. Looking at the best way to use that, given my current life situation.
Here are the good details: I’m 36, married, and we each bring in $80k/year salary though we don’t comingle our income for the most part. I have no student loans (paid off last year!), approx. $200k in my 401(k) that I contribute 5% to with a company match, and $20k in a ROTH which I’ve contributed $2k to this year so far. I also have about $12k in personal savings. (Recently used a chunk for a down payment on a car)
Now for the debt: I do have quite a bit of credit card debt to the tune of $20k (most of it is 0% APR CCs through mid 2018), a personal loan of $26k (10% APR), a car loan of $6500 (4% APR). I also have a townhouse rental property where thankfully the rent covers the mortgage payment, and we each pay $800/mo towards the mortgage for the condo we live in.
The big life event that’s making this a tougher planning process: We’re expecting our first kid in 5 months! We currently have $6k in a “Baby Savings Fund” (separate from personal savings) with an auto savings deposit of $300/mo. Full time daycare runs around of $1900/month for the area. We’ll want set up a 529 for the kiddo, but not sure how much to put in each month. But otherwise, not really sure what to do to prepare for the kid!
What I want to do is: 1) pad my savings to $35k (~7 mo living expenses), 2) fully fund my Roth, 3) pay off the personal loan and car loan, 4) put $6k into a townhouse emergency fund (3 months mortgage). Should I wait on my credit card debt since most of it is on 0% APR til next year so I get a little interest (free $ is free $ right?) on what’s left of inheritance? If I pay 100% of my debt (besides mortgage), that’ll free up $1700/mo. That leaves quite a bit leftover, but with the baby coming I don’t want to squander it!
One more side note – my spouse is on a work trip that will bring in an extra $8k in the next month. He’ll use that to pad savings, too, and I want to make sure we both put $$ aside for the kiddo. He has no student loans, car loan, or CC debt.
What to do what to do? Thanks in advance!
PS: I did read an older inheritance post you did where you talked about goals… thought I’d add some of mine. My biggest driver is : I’d been unemployed for a year before, which decimated my savings. I got help from family to pay my mortgage a couple months. That’s where half my debt came from too. I never ever want to go back! And now with the kiddo coming, I want to set him/her up for not stressing about money too. My husband has always been frugal so he’s totally on board.
Oh the possibilities! What a great position to be in! (Minus the reasons behind the money, of course)
I love that she threw in the PS there at the end too because one of the most important things with this stuff is to KNOW YOURSELF and *why* you’re drawn to certain actions over others, even if they look strange from the outside. There’s nothing wrong with making moves this way so long as they don’t F you or your finances over, so anytime you’re super excited to go one route over another I say go for it! Who cares if others would do it differently, they’re not living your life?
*Awkward transition to others giving their opinion now…*
Okay, so what would I do in her shoes? Well, pretty much everything she already stated above with the addition of one minor/major? change. I feel like she already *knows* deep down what she wants to do – which is great! She’s been thinking hard! – but we’ll see if our additional advice sways her one way or the other :) I’ll go first, then it’s your turn!
Here’s what I’d do with the money…
#1. Hold onto the $100k cash for 2-3 months and let it all soak in!
It’s one thing to *know* the money’s coming, but a whole other to let it simmer in your bank account and feel SUPER CONFIDENT knowing you can pretty much do anything you want before unloading it… This prevents you from doing anything stupid with it too, especially in the case of winning the lottery! (Check out this article on 21 people who won it and then lost it all – ugh…)
#2. Once the anxiousness kicks in, start knocking off your Want List
Again, our friend here has a great sense of herself and pretty much already knows what she wants to do with most of it, and since they all improve her net worth and general comfortableness, I’m 100% for it. The real question is what to do with the money that’s *leftover*. Which I’m pretty sure we all here know what that answer should be ;)
Here’s her want list again, along w/ the amounts it’ll take to release the kragle:
- Padding her savings to $35,000 (+$23,000)
- Fully funding her Roth IRA (+$3,500)
- Paying off both her personal loan AND car loan ($26,000 + $6,500 = $32,500)
- Putting $6,000 into her “townhouse emergency fund”
That’s a total of $65,000 going to a new home, leaving her with $35,000 left…
#3. PAY OFF EVERY LITTLE BIT OF CREDIT CARD DEBT!
The extra savings in cash may feel good, but I’m willing to bet that being completely debt-free would feel even better over time – especially with the new baby on board. The Want List already took care of a bulk of the wanted savings, so why not shovel $20,000 right into the debt and have the best of both worlds? If the credit cards aren’t paid off now – with “free” money mind you – when will they be?
And here’s some other good motivation that she already alluded to: it would help free up $1,700/mo of cash flow too! Which can then be directed to a number of future goals as well! And considering NONE of this even accounts for any contributions by her partner throughout time – which I’m sure will be a lot since he’s so frugal and also makes a decent income – their family is definitely sitting pretty.
#4. Dump a chunk into the 529 account
If all the above wasn’t awesome enough, she still has $15,000 to play with! And since the 529 is the only thing we haven’t touched on yet, my vote would be to send $10,000 into it in one fell swoop to get that compounding going. It would serve her better over time than breaking it into smaller monthly deposits too (again cuz of compounding, despite dollar cost averaging), and from there you’ve hit all the main goals on the list. Woo!
But that still leaves
us her with $5,000 left…
#5. Do something *special* for you or your family
As responsible as all the financial goals are, which now make up for 95% of the inheritance, I’d stash the remaining $5,000 aside to do something really rewarding or special for either yourself or your family in the near future. I’m sure your father would love to be able to contribute towards that, especially if it’s something you wouldn’t naturally do for yourself because you’re so “responsible!” And even better if it’s towards something that would also honor your dad’s life as well :)
Maybe a trip to somewhere he found special or always wanted to go? Or maybe starting or enhancing a hobby/passion you two shared together? Or what about going on a shopping spree that he’d look down and laugh at but approve of you finally letting loose?? Haha, I dunno…
Either way, keeping a little money aside to be able to “splurge” a little can def. do a person good. ESPECIALLY when a new baby is on the horizon and life will get about 10x more “interesting” :) But what a blessing indeed… One family member leaves, and another one comes in. The circle of life, baby.
#6. Allocate the new $1,700 earned back via cash flow towards whatever needs strengthening!
This is the cherry on top of it all, and the area you can feel even more free to do what you please in order to fill in the remaining cracks you see. Even if it seems like overkill to others (again – it’s your life! Do what makes you feel the best! Though may I recommend maybe upping your 401(k) contributions more for an extra boost? ;))
And here’s the best part of this cash flow cherry: It not only grants you $1,700 the first month, but it continues forward sending you $1,700 the second month and $1,700 the third month and the fourth month and on and on into eternity or at least until baby #2 and #3 comes ;)
It’s the gift that keeps on giving! Which means getting to make these nerdy decisions every single month as you continue to fortify your finances. A wonderful dream for any father’s daughter.
So those are my thoughts…
You’ve got plenty of money to last for years now, and you’ve got a loving husband who will also be helping you out across the board too. You’re going to be fine no matter which route you go, and all that’s left now is to love the crap out of your baby :) You can never love them too much! One of the best pieces of advice I got myself through this journey.
I now open it up to you, readers! What do you think of these plans here? What would YOU advise if you got this $100k and were in her shoes?
Share all your smart words below, and then pat yourself on the back for being productive this morning! It’s much better than the 100 other things we’re about to do when we log off here to distract us from the work that’s needing to get done today ;)
God bless, all.
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!