$100,000 - What to do?

[Bonedry]

For the record...

I am single and have no dependents. In my mind, my number one priority is to pay the mortage off immediately since I would be able to save/invest most of my wages thereafter (although you are all slowly changing my mind on this perspective).

One option I have considered is to throw the entire amount into the mortgage (@ 6.5%, leaving a $39,000 balance) and then put the bulk of my wages into the principal for the next 2 or 3 years until it is gone (I would still be maxing the 401k during this period). After that, I would go after the second mortgage (@ 5.75%) and then start saving (EF, ROTH, ect) from scratch.

I realize that I will live frugally and have no personal 'safety net' in case of emergencies, but my parents are well-off enough to help me if I should run into any real emergenciies.

Thoughts?

[MonkeyMama]

Beyond everything else mentioned about the ROTHs, there is probably no other tax shelter for his income - he's already maxed out the 401k. So, regardless of his income, if he wants to build up a large amount of savings, the ROTH is a decent tax shelter. (Beats no tax shelter, in my opinion. Many wealthy people fund non-deductible IRAs along the same vein).

[MonkeyMama]

.

Thoughts?

Lack of liquid cash can lead you to financial ruin. I would not skip an EF. If you are not a fan of a large EF, at least put away $10k. I have personally found that $5k covers most of life's emergencies, but would always save more because unlimited factors could affect a job. Do you have disability insurance? Your job could be steady, but what if you are disabled tomorrow? Stuff like that. In addition to the fact that anything can happen to anyone's job.

The thing is, if you refi the mortgage (15 year/substantially lower rate), and apply maybe $80k - $90k of the money to the mortgage, it will still be paid off considerably faster than your current trajectory.

Maybe real numbers will help you:

Your mortgage payment is about $1k per month, and the principal is about $200/month. You are adding $400, so paying $1400/month total and reducing the principal by $600/month total.

If you used the cash to save $20k, pay off $20k LOC, and reduce your mortgage by $60k, and refied to a 15-year loan, you would have payments of about $750/month. You would then continue to pay $1400 per month total. You would be paying down principal at a rate of $1050 per month. This puts you on a trajectory to pay off your mortgage in about 6 years, with the same payments that you are already paying. You just shaved about 10 years off your mortgage, and have some cash savings for a rainy day. That is precisely what I would do in your shoes.

I would love to have my mortgage paid off to, but am not going to sacrifice my short-term financial health to do so.

P.S. Our parents are also in great financial health but I would never put myself in a position to rely on them. I think of them in the worst case scenario. IT feels warm and fuzzy to know that you have that to fall back on in the worse of times, but that's about the extent of my thoughts on that. Do your parents a favor and let them stay in great financial health.

[snshijuptr]

If you are mature enough to own a house, then you are mature enough to not rely on your parents in an emergency. If your water heater burst tomorrow, you'd want some money sitting around while you wait for your insurance check. Don't expect to borrow from your parents. Be an adult and have cash set aside to pay this off.

Put aside 3 months expenses (only minimum expenses, not discretionary expenses). The idea is the cost of repairs is proportional to your expenses. If you have higher expenses, you probably have more dependents, more debt assets, more expensive cars, etc. 3 months expenses is probably only $10K for you.

Alternatively, you can do a few simple calculations. How much would it cost you if one of your cars was totaled? What is the cost of the most expensive repair in your home (assume you have to move out during repairs)? What would happen if you were hospitalized for a week (include lost pay)? What are your insurance deductibles? Now think about the worse case scenario that you find reasonable. That will give you the money to save.

Then you can use the rest of the money to pay down your mortgage.

[Bonedry]

I have decided, thanks to you all, to put 10k cash aside for an EF, pay off the second mortgage, fund my ROTH account, and put the balance into the mortgage principal. I am going to also refinance the home next year (a 10 or 12 year fixed) with whatever rate I can get. This will allow me to do both the responsible thing and also the... responsible thing.

In terms of ROTH for 2011 - I thought that the max used to be $4000/year... Is it still this way? Also, do I still have until April to fund the previous year?

I think I will be emotionally better off knowing that I have an EF set up, not to mention I will still be able to pay the house off in about 5 years.

[creditcardfree]

Great plan! No one should be without an emergency fund.

The maximum for a Roth IRA is now $5000 and will be the same in 2011. You have until April 15th, 2011 to fund the Roth for 2010. You should consider funding it for both tax years since you have the money now, in other words, $10K.

[Ima saver]

I think it is a great plan too!

[MonkeyMama]

In terms of ROTH for 2011 - I thought that the max used to be $4000/year... Is it still this way? Also, do I still have until April to fund the previous year?

The ROTH limit is $5k per year (2010/2011) and yes, you have until April 15th to fund the prior year.

ETA: I didn't see ccfree's post - she covered it!

[krantcents]

[QUOTE=Bonedry;278343]I have just inherited $100,000 tax-free from a relative who passed away. What should I do with it?


Personal Financial Situation:

I am 33 years old, and make $65,000/year at a 'high' security job. I do not forsee any major pay-raises (except periodic ones for inflation), and I plan to work until I am in my 60s.

I max my 401k every year (currently $16,500 yearly) and the balance in my 401k account is currently $100,000.

I receive a tax-free gift of $5000 every year.

I receive $3500 every year in my tax-return.

I bought a house 5 years ago for $199,000 @ 6.5% (30-year fixed, $40,000 down - no PMI) and currently have a principal balance of $139,000.

I have a second mortgage (home equity line of credit) debt of $19,500 @ 5.75%.

I own 2 vehicles that are paid off and have low mileage.

I have no credit card debt.

I have a ZERO balance in my savings account, and my checking account balance is nearly dry at the end of each month.

I have a ZERO balance in my traditional Ameritrade (Stock/Bond) account.

I have a ZERO balance in my Ameritrade (ROTH/IRA) account.


I am a firm believer that saving as much as possible NOW is the key to a lavish, if not comfortable retirement, and I want to get the house paid off ASAP so that I won't be throwing my money away paying interest for 25 more years. This last year, I have been putting extra money into the principle of the house each month (about $400 each month). After the house is free and clear, I plan to invest the bulk of my future paychecks in the Stock Market/Bond Market.

That being said... what should I do? Pay the house down, pay off the second mortgage, invest the full amount, other ideas?[/QUOTE

I would invest the $100k in mutual funds and dollar cost average into the market. I would probably look at a variety of asset allocations. Review you choice quarterly and annually. I would also look at refinancing your mortgage and HELOC before rates go up any further.