What to do with an inheritance?

[TBH]

I need advice. I'm expecting to receive an inheritance this summer, probably about $24,000. I am thinking I should just keep it in cash, but I'm tempted to use some of it for other things.

We are 48 and 34, with one child in first grade. Our income varies quite a lot. I'm self-employed and my health is up and down, so I'm not able to work full time. Our income at the low end is probably $65K and at the high end is more like $85K. I think a reasonable average is $75K. Our expenses are around $4500 per month. We save 15% for retirement and are as tax-efficient as possible.

My Net Worth IQ profile shows our household assets.

Some unusual things about us:
We have more college savings than we probably should, because the grandparents have contributed heavily to our son's education. We currently have nearly $60K in college savings, and we don't add to it (unless there's an unexpected grandparent check earmarked for the purpose) because we are a bit behind on retirement savings.

We have one car that we bought used a couple years ago. It's Japanese and I expect to drive it for 8+ more years. We have no debt except our mortgage.

We also keep lots of money in cash because our income fluctuates so much.

That's why I'm thinking I should just put this windfall in cash. But I can think of many other things to do with it. Our house has dropped in value (we bought it for $275K two years ago) and I'd like to pay down the mortgage somewhat just because I dislike having so little equity, but our interest rate is 4.625 and I know it's silly to prepay. The house needs some not-very-urgent repairs, so I could use some of the money for that. I've thought about trying to make a big investment that will hopefully reduce our expenses going forward, like doing a home energy audit and weather-proofing, or even installing solar panels. Another idea is to make a $10K lump-sum payment on the mortgage and get our loan company to recast the loan, which would bring our payments down a little without our having to refinance. I've also thought perhaps we should put it into our retirement accounts. We don't normally contribute to our Roth IRAs much (spouse has a workplace plan and I have a SEP-IRA) but we could put money into our Roths for 2011 and 2012.

Lots of ideas. Thoughts? I know I should just keep it in cash because our income is not very high relative to our expenses, especially in the down years. Please tell me if I'm crazy to contemplate other options.

Thank you.

[MonkeyMama]

Just a couple of thoughts:

I think it's totally fine to just put the money in cash. The thing about this choice is that it leaves endless options for the future. For one, you don't have to decide on the ROTHs until April of next year (that being only for 2011 ROTH). So why not just put it in cash and see how things go? The answer may come more clear to you after more time.

In general it is advised not to do anything for 6 months when it comes to inheritances. I know this is know huge sum, but your uncertainty makes me think this would be a good rule to follow. Give it time. Give it thought.

Secondly, I do not agree that it is *silly* to prepay your mortgage. The last decade hasn't been a great decade for investments (real estate, stocks, or otherwise). Interest rates are abysmal. I am not a huge fan of pre-payments early on for young people, BUT, you have to admit the guaranteed return of 4.625% - paying down the mortgage - is not half bad. I think paying down $10k and recasting the loan is a great idea, for one. But only if you are confident with the cash situation. Liquidity concerns should trump mortgage pre-payments.

Reminds me, ROTHs are win-win because you can pull the money out later if you change your mind. Not that it is recommended, but would give you more flexibility than mortgage pre-payments.

[TBH]

Thanks for not shooting down my recasting-the-loan idea, MM! The scariest thing financially is my health situation, so I think keeping most of the money in cash is probably best. But I really feel uncomfortable with how high our mortgage payments are, so if we can lower them even a little bit (and pay off some principal at the same time) I think that might be the best combination.

[mcfroggin]

Originally Posted by TBH

Thanks for not shooting down my recasting-the-loan idea, MM! The scariest thing financially is my health situation, so I think keeping most of the money in cash is probably best. But I really feel uncomfortable with how high our mortgage payments are, so if we can lower them even a little bit (and pay off some principal at the same time) I think that might be the best combination.

I personally think paying off that mortgage early isn't the best plan. The interest isn't that high. The money could be better placed in your retirement fund. I know debt is "scary", but you shouldn't let your emotions keep you back from maximizing your financial situation.

[jpg7n16]

IMO:

Invest in stocks > pay down house > keep in cash


You already have a ton in cash according to your NetworthIQ

[snafu]

There is no need to make quick decisions. I suggest finding the e-bank with the highest interest for your cash stash and inheritance. If wife's employer does any retirement matching funds take full advantage of 'free' money. The inheritance can be divided into segments when you feel more comfortable. A ROTH retirement has the advantage of keeping interest/dividend income tax free. How much have your payments to date reduced your mortgage? Run the figures to determine how a lump sum payment on principal affects your mortgage. How many months would reduce? How much interest would be saved?

The stock market is pretty choppy just now and some of us see it as a buying opportunity. You can buy into a quality, low cost Dividend Mutual Fund on *DCA* Dollar Cost Averaging or Dividend Exchange Traded Fund [ETF] from a discount brokerage. Should you need to add to your income these investments can be cash in your checking account within two business days.

In my view, the problem with cash is the erosion of buying power. A gallon of gas is no longer $2.30 and every time you walk into the grocery store, the prices of common items seem to have increased.

[KennySoward]

While I'm not a genius with the investing piece, I do agree that giving yourself some time to think about it is the right thing to do. Usually, time brings clarity of mind. You don't HAVE to do anything with it right now. Sometimes it is a great feeling to just have that extra waiting around.

[kork13]

I like MM's idea of using the Roth as a sort of holding tank, particularly since you don't normally use them anyway. You have about a year of cash assets on hand, which in your situation, is probably a fairly good amount for you. But by using Roths, you would retain the ability to (if necessary) withdraw your principle without penalty, while leaving the gains/dividends invested to continue growing inside your Roth.

I think putting at least a portion of it down on your loan could be a good idea, just to bring your principle down somewhat. But would just $10k be enough to have your bank recast the mortgage and have it be worthwhile? I really don't know everything that's involved with doing that, but from a numbers perspective, $10k would only be 5% of your mortgage balance. While undoubtedly significant, I just don't know if that is enough to convince your bank to recalculate your mortgage. Also, my understanding is that they are typically reserved for distressed homeowners who are trying to keep out of more serious trouble. You should talk to your bank and inquire about their policy for recalculating mortgages.

[TBH]

Kork, thank you for this.

My bank will recast my mortgage as long as I make a lump sum payment of $10K or more. But that won't reduce my payments too much. I think it's like $50 per month or something, and it costs $250 or so to recast the loan, so it would take a little time to recoup that.

There are some home repairs that are feeling a bit more urgent (slightly leaky siding, and several times we've heard squirrels behind the siding, so probably the siding needs to come off.) So I think we'll do that, and hold onto the rest of the cash til we know how much the house project will cost. Then we'll decide whether to throw it at the mortgage, the Roths, or just keep it in cash.

Thanks for your help, everyone.

[FrancisABoyd]

Your home is probably the best place to invest, so I agree with you fully there!

[couchrobt]

Even though I'm not an active body with the investing piece, I do agree that giving your self some time to think about it is good. And You seem to have it all figured out now. All the best on your next step.