Dear Ms. MoneyPeace:
I received unexpected money from my uncle’s estate, but not enough to celebrate and plan an early retirement. I have a secure job, money in retirement, a nice condo and a decent car. My older sister plans to beef up her child’s college fund with her windfall. She keeps saying I should invest.
My brother plans to buy a boat with his $24,000. He suggested we both “invest” in, and share, a bigger boat. This has never been one of my dreams, so it’s not enticing.
Am I being a party pooper? I just don’t want to make a mistake, as I saw a friend dump $22,000 on a Harley-Davidson motorcycle when his dad died, and he quickly regretted it. He sold it for half the price when he grew tired of it.
Is there something I can do that will bring me peace of money mind?
Frozen in Florida
Peace of mind is hard to come by, but you’re on your way just by asking the question. Don’t think of your hesitancy as “freezing up” but, rather, as thoughtful reflection.
Inheritances are tricky. You don’t say how close you were to your uncle, but emotions are bound to be tied up in this financial decision. There is sadness, surprise and for some regret. When money gets tied up with loss, often impulsive decisions are made from a slippery, precarious place, which is why widows and widowers are encouraged not to do anything major for a year. Not rushing is fine, as it is easier to avoid mistakes.
Many people think they have to do something with all of an inheritance or windfall. Then, a few weeks or months later, they forget where it went, or regret it, as your friend did. Or they acquire something that leaves them in a worse place financially. This is all about financial balance.
Separate the lump sum into three purposes: past, present and future. That will make your decisions easier.
Here is a strategy to get you started:
What debts do you have — credit cards, personal loans, student loans, car loans. If you are one of the 39% of Americans who used a loan to purchase a car, $ 8,000 — one-third of $24,000 — will go a long way.
When buying a car, it’s not about how small the monthly payment is, but how quickly you own the car outright. Even if you have a low interest rate, you still have a monthly payment. Reducing debt and payments are the best way to improve your financial picture.
When you pay off your loan, save half of the previous monthly payment for the next car, even if it’s 10 years down the road. The other half will be extra cash for fun. The average monthly car payment is $550.
Make a plan for a better today: Be practical and fun. This is a two-part distribution for your money. You don’t mention if you have a safety account. If you are one of the 59% of the adults in the U.S. without cash to cover an emergency, this is your opportunity to build your savings.
Consider adding $4,000 to a safety account today and then contribute a small amount each month to build a good savings habit.
Now that the practical is covered, think pure fun! Spend some money on a hobby — maybe you want a new circular saw or gas grill. Put some aside for a vacation post-Covid-19 — but have fun planning the trip now. Splurge on a new recliner or great set of cooking pans. This play money is for you to enjoy.
This third is for the long-term: Retirement or college funding. You have already gotten started on retirement — good for you! As you do not mention children, focus on retirement.
This is an opportunity to think about your future by paying off part of the principal of your mortgage. This is simple: No need to refinance. When you make the payment, mark it as a principal payment. By paying $8,000 today, you accomplish three things:
- Save money on long-term interest.
- Pay off your mortgage sooner.
Increase flexibility in your retirement
Why consider paying off your mortgage? Investments aren’t guaranteed. But you’re paying interest on your mortgage. That is a known quantity, so paying down the mortgage will save you money. You will join the ranks of the 37% of Americans who have paid off their mortgage quicker.
If you really want to invest this money, put it in a Roth IRA, traditional IRA or brokerage account. A traditional IRA is the only one that will reduce income taxes today. IRAs have a $6,000 contribution limit, unless you’re over 50. (In that case, you can contribute $7,000.) Be sure to check with your accountant or investment adviser to be sure you qualify, since you have a plan at work.
Schwab, Vanguard and Fidelity, for example, are low-cost investment providers where you can open an IRA or a brokerage account. They have a range of mutual funds for your $8,000 — bond funds, stock index funds or target-date funds, which are designed to be more conservative as you age.
Finally, take 10 % ( or some portion if that’s too rich for your blood) and give a donation bigger than you usually do to a charity in your uncle’s honor. This money was unexpected. Keeping the flow of money moving is good for all. Yes, you may not get a tax deduction, but this is a feel-good move. Or consider it a thank you for the gift.
When it comes to inheritances, having a strategy is what matters. The “divide and conquer” strategy works whether the inheritance is $1,000 or $100,000. Good financial behaviors are built on a thousand little decisions. An inheritance well spent is an opportunity for a stronger financial place and more peaceful future.
Peace and prosperity to you,