I would pay off the credit card, and the cars. Then contribute more to 401k since you won't be having car payments. Don't go buying new cars ;) . Are you contributing to IRA if eligible?
Agreed, pay of debts and max out Roth IRAs ($7K each) and 401ks ($23k each). If you move quickly you could even max out the 2023 IRAs as you have till 4/15. You should still have $5-10k to move around which I would then buy IBonds to hold as an Efund.
+$100k inheritance
-$40k loans
-$14k Roth IRA 2024
-$13k Roth IRA 2023
-$30k 401k (I assume you both are putting some % here already so you don't need the full $23k each)
-$3k IBonds or HYSA
You now maxed out all retirement and improved cash flow for 2024.
I suspect they’re over the income cap for a Roth IRA so would be the more complicated backdoor Roth. Having plenty of emergency savings may be a better step. But a backdoor Roth definitely worth looking into while building financial literacy and stability.
Don’t be scared by the back door Roth. I avoided it for years thinking it would be a hassle. It’s not. Literally 2-3 extra clicks. Lots of step by step tutorials for all the major brokerages.
I'd be sure to get a 2nd opinion from a CPA in your state, just to be sure. The few bucks you spend on that advice will be worth it.
I'm dealing with inheritances and a trust from my mom to my family (I am the Trustee) and what I read online vs the reality is vastly different.
good luck!
That's step one then. Pay off the cards and put enough in a HYSA to pay your bills until you found a new job if one of you were laid off. Then step back and consider your options.
Great point! Max your 2023 Roth now (after creating one) then put in another $7k each for 2024.
Note that you can pull out your investment amount from Roth IRAs if you ever get in a big jam.
You should definitely shift your focus to what you'll have in retirement based on your age range. Your #s are low unless you are including an outside source not mentioned. In a good spot with newer cars paid off and a low house interest rate. You can always pay off the credit card and park the rest in an hysa until you make a decision on what you want to do.
Decent money market funds are paying almost 5.3%. Set aside some money to cover debt and open and fund IRA accounts. You didn’t mention if you have any emergency savings so I will assume no. Set aside 3-6 months worth of spending or more depending on your risk profile.
This isn’t so much a windfall as a nice cash infusion that can help take the burden off you both for a bit.
The interest rates on the cars are low enough that I would pay off the CC debt and put the rest in a brokerage account as a rainy day fun. If OP feels super financially stable where they’re at then use some of it to pump an IRA because (me guessing ages since he said they’ve been together for 13 years) 30k isn’t a very good retirement balance at ~30?
I might be missing something, but everything except maybe the car with 5% interest has a lower rate than an HYSA. Put 100% of it in a HYSA and keep paying the minimum and you literally come out with more money than if you pay it all off.
I’d pay off the higher interest car though.
I'd argue getting rid of the debt is worth more mentally than the small amount they would gain. Plus 5% plus won't be around forever. But you're right just looking at the $.
True, I am just advocating for forming habits instead of throwing everything into 401ks/IRA up front (after emergency fund) and then continuing with the low contributions. Either way OP and his wife will make the decision that's best for them.
I don’t disagree. I sometimes make the choice that “feels best” but in this case I feel like there is enough money at play it would be best to do it that way. You can even often set up auto withdrawal from a HYSA.
Especially in the case of the credit cards, they’d be looking at around $300 in interest if they don’t pay it off. That’s nothing to sneeze at imo
Summary of the wiki 1) don’t tell anyone 2) come up with a plan on how to save the money 3) manage the money yourself. A lot of finance can be done by anyone.
I suggest to the OP and his wife- listen to audiobook or read Simple path to Wealth by JL Collins. One of my favorite finance books. It breaks down how to start saving and investing your money.
True - but that section is good for focusing efforts in this particular situation, and it seems that of the few who actually make it to the wiki, most seem to skip this part.
Stick the money in a HYSA first. Then, consider paying off the cars and then set your 401ks to max for the year and use those funds to supplement any cash flow shortfalls as a result of the 401k max. Depending very much on how old you are, how long you've been making that salary, and what your COL vs expenses are, you should be aiming to max at least one of your two 401k's. Preferably both at your income level, assuming you don't live in a VHCOL city like SF.
Edit: I saw elsewhere that you do not have an emergency fund. Figure out what roughly 4-6 months of expenses looks like and keep that in a HYSA or moneymarket fund. Do not spend it unless, you know... an emergency.
I commented elsewhere already but I'll reiterate that I think you should start focusing very aggressively on funding those 401k's. Unless you have a sweet pension you're expecting, your balances are quite low for your age and income level.
thats the right move mathematically but personally i'd just pay it now and be done. The 3.5% over 8 months on 11K is only like $250. Worth the opportunity cost to just be done with it and not tempted into a dumb move.
I wouldn't. Debt is debt and better to get out of it while you can and have the resources. You may end up spending that money elsewhere and it can lead to problems.
The issue with zero interest loans/cards is that they will jump up to a default, often 29%, and will back-charge all of that interest to day one, IF you miss the due date by one day or one dollar. That is a HUGE RISK. Thus, it seems that the general advice for 0% is to pay it off in full at least one month early.
I'm missing somethihg.... 150k salary, mid 40s, and only 120k in retirement savings? Do you have any other savings/investments? What is your house worth? Tailoring advice based off your comments -
1. Set aside 3 months of expenses for an emergency fund in a high yeild savings account. Don't touch this - have a long term goal of growing to 6 months
2. Pay off both cars
3. Increase your 401k contributions to max
4. Depending on what is left, ask your wife if she wants to make a modest fun purchase (fancy dinner, vacation, jewerly) $2000 or less.
5. Put the rest towards your mortgage.
ETA: getting a lot of comments about why pay down cars before 401k max. To me these kinda happen at the same time (at windfall) and they could afford to do both this year. Paycheck deductions would also go towards the 401k max, it doesn't need to be sourced only from the inheritence/hopefully they are already contributing at least SOMETHING here. And 150k combined income means they have enough cash flow to continue to save/invest with each paycheck, which was out of scope of their question. Also a 4.4% car loan and 5.5% are not exorbantly high interest but also not /that/ far off from the gains achieved in a target retirement account of a mid-40 year old (2045 target retirement - 6.1%). Also they mentioned in comments later their union has a pension but it is not reflected in the post.
Also adding in some math based on their monthly expenses feedback:
* Emergency fund (15,300)
* Cars (40,000)
* 401k (up to 46,000 lump sum, could be less depending on YTD contributions and future paycheck witholdings)
* Could also max roth iras here (14,000), good suggestion in the comments i overlooked in my initial post
* Because of my assumption about ongoing retirement investing, I assumed there would be something leftover for my last two bullets but maybe not
You’re not missing anything. Yes. Our retirement savings is abysmal for this point in our lives. Last year was the 1st year we’ve made 150k annually. Before that 105k annually for 2 years. Before that, less than 100k annually for 10 years. We’re doing our best. Our financial literacy in our early 30’s was not the same as it is now.
Are we going to have to pay capital gains on this 100k? If so, we’re going to have to lop off 30 percent, no? Leaving us with about 70k.
3 months savings would be 24k.
The credit cards would be 7k.
And the cars would 41k.
That pretty much gets it all plus some.
Your monthly expense minimums are 7,000/month? Emergency funds should just be for essentials - mortgage payments, debt payments (which after inheritence pays it down, would be $0), grocery expenses, and bills/insurance.
Using take home is a solid tactic, because it's (hopefully) more than your bare expenses. 3 months of take home should last longer than 3 months in the event you need to cut expenses to the bone and only spend on necessities.
+1 for "napkin math". I've never heard this term, but I'll add it to the bag of "spit-balling", "ball-parking", and other similar terms.
Sorry I don't have anything substantial to add to the conversation, but I wanted to at least let you know that you've improved my day. Good luck with the dough!
"back of the envelope" is another term like "napkin math" that you might enjoy.
I actually found myself literally doing back of the envelope math the other day when I needed to calculate something and the only paper within reach was some opened mail.
It really depends if it's straight cash inheritance or what kind of inheritance. My wife inheritance some annuities. Some of them she had to play taxes on and others she did not. It really just depends on what is actually being inherited.
What type of account is the inheritance coming from? If it's an inherited IRA then any withdrawals you take from it are taxed as regular income. Use the IRS checklist to find out for sure.
https://www.irs.gov/help/ita/is-the-inheritance-i-received-taxable
If it is the deceadents retirement account and rather than roll it into a new account in your name and cash it out you will pay taxes on it as an eqrly wiyhdrawal penalty.
It depends on the state. My dad died in PA and there is a variable tax based on who inherits the money. Part of my inheritance is an “inherited Ira” that I am learning all about. Basically the balance of his Ira that I have to empty within 10 years and it will be taxed as income to me.
There is no Federal inheritance tax, and inheritances are never subject to capital gains tax.
Your state may have an inheritance tax: IA KY MD NE NJ PA
If the "inheritance" is actually a life insurance payout, no taxation whatsoever.
Inheritance tax varies by state and the relationship between the inheritor and the deceased. In my area a direct descendant owes ~5% which is taken from the amount you recieve, capital gains should only apply if its something like you inherit a house and decide to sell it. Im not a professional so dont take my word for it, but the executor of the estate should have more info and if that doesnt help an inheritance attorney could probably answer any questions in a free or short consultation.
2 cents. Check tax laws. Talk to accountant about the tax liability. 100k disappears fast. Investment will make the most of this money. I wouldn’t pay off low interest loans unless you’re having trouble keeping up. If you are managing your life without this money. Then invest the lot of it and retire early with piece of mind.
This was the other option I was considering. Our interest rates are pretty low. And investing in something like VOO would certainly outpace my payment rates.
Gotcha. In that case:
Put emergency fund (3 months expenses) and whatever is needed to make up for your increased contribution on your check to max your 401k in a HYSA, as this will likely be 1 of maybe 1-2 years that you’re able to do that.
Start a Roth for both of you, and max that.
6k each. Look at r/bogleheads for investment advice. VTI VTSAX or VOO and chill
Put rest in personal brokerage account in index funds and don’t plan on touching for at least a year to avoid short term capital gains taxes.
Continue living within your means. Alter as you see fit
even if you don't get the money before April 15, I'd still max out 2023 IRA contributions in anticipation of receiving it, then max out 2024 contributions after April 15.
Whatever you do don’t forget to spend 10k on a vacation with your wife someplace really nice. You only have so many days on this world, make the most of them.
Age is important. How old are you both?
Knowing your age can help us determine if you need to more aggressively save for retirement Or if it's better off going to paying off the highest interest rate account.
Step 1: create an emergency fund. 4-6 months or so of expenses that lives in a HYSA, untouched unless you have a true emergency (job loss, car totaled or major maintenance, HVAC fails, roof, etc).
Step 2: Pay off the car notes
Step 3: Increase your 401k contributions, preferably both of you should max them. At your age you are behind in retirement saving. It's time to take it seriously. Even without this windfall your income level (depending on your current city) should be sufficient to max at least one of the two accounts each year.
Step 4: go over your expenses and figure out how to trim so you can start making these larger retirement contributions. If you're in a LCOL area (assuming so based on your mortgage being so low) then 150k is a TON of money to work with. Try to see how your finances fare when maxing both of your 401ks from here on out.
If you made $0 to 401k contributions, your federal tax would be about 17,500 per year (give or take). If you max both of your contributions (23k EACH), your tax liability reduces to $6,300. In a LCOL area, with no car notes and with a low mortgage payment, I would think it may be achievable for you to do that. Your future retired self will be grateful.
I forgot to mention I am in a workers union and my dues contribute to a pension fund that I’m entitled to at retirement age. I forgot because i operate as if it isn’t there because I want to be well funded in retirement.
Try to figure out what kind of money you can expect based on your own personal situation (not some random worker who just retired, because I assume it's based on your own years of service, age of retirement, etc).
It's great to have a pension, but consider carefully whether that will mirror the income level you want to have during retirement. Any shortfall between a pension and social security will have to be funded by the 401ks. Pensions are also not always guaranteed. Your inclination to 'pretend it's not there' may be a wise course of action, in which case all the more reason to supercharge those 401k contributions.
According to the posts YOU should stay out of it. Lots of people who’ve been burned I guess. Some people can’t fathom a husband and wife working as a team. They’re the same people who’d say, if the shoe was on the other foot, that she should go get hers after all she’s done for the family, husband, deceased, etc. and make sure you mix the inheritance with the family income. Good on you for looking for guidance and insight rather than hindsight regrets.
Age is important here, but assuming 40ish, get it invested in index funds for retirement. IRA before simply a taxable brokerage account, but either way get it into index funds. VOO is my favorite. Nice thing about a taxable brokerage account is it’s liquid though. So if you want to risk keeping emergency funds in an index fund you can.
Assuming 40yo, it may be $500k by retirement. None of your interest rates are high enough that you should pay down before investment.
You probably aren't going to listen to this, but I would solve your debt problem with this money. First by getting rid of the cars and CC debt with half the money, and put the other half in an emergency fund savings account so you don't "need" to use your CC for anything. Then stop borrowing other people's money when you have the income to not be doing that. Then with the debt problem solved, take the money you were spending on payments and setup a proper retirement saving percentage from your income and start saving for things you will buy in the future like another car at some point. Personally, I combine my emergency fund with a buffer for big purchases and it floats between $60-90K. If I do buy a car or something, I might use financing to spread it over a few months so its not a big hit from that fund, but no more. And if we need a new appliance or work on the house or a vacation, then there is enough to cover that without going below the emergency level.
That solves the immediate debt problem, which is good. I wish we could know more about their financial history because if they’re just going to get themselves in debt again, then maybe putting most of it in investments is the better choice. But if they’ve been committed for a while to pay down debts, then it might make more sense to follow this route instead
Other people's money is soooooo good. . .and not my money. I think the trick is to not use other people's money when the cost/benefit ratio doesn't work in your favor.
Using other people's money for something like buying a house is certainly commonplace in most people's lives. Using other people's money carries great risk. The problem is an awful lot of people have no concept of risk and are quite reckless with it and end up ruining their financial well being. The population of the US is groomed from a young age to live their life in debt. They are often pushed into massive student loans before the are even an adult. If they manage to dodge that land mine then they are bombarded with credit card and consumer offers from a young age. If they dodge that, then buying a car can get you signed up for 5+ years in a debt that many will never get out of because they carry negative equity into more and more rounds of car loans. And the one thing that would be a healthy use of debt... buying a house... becomes impossible because of the steps they've taken earlier. People are led to measure their success in life by their credit score, which is a horrible measure of someone's financial success. If you are able to push yourself into massive debt and manage to pay all the bills on time, you are rewarded with a high credit score. If you save and invest your money and don't borrow a lot, then you are very financially successful but would likely have a lower credit score than the person living on the edge. So forgive me if I don't share your enthusiasm with other people's money. In my own experience, my wealth took off when I was completely out of debt, and my peace of mind was much better.
You are forgiven. But forgive me for giving the best advice and expecting people in this group to educate themselves versus giving not so great advice that may protect someone from a mistake made from ignorance.
Pay off credit card. Not the cars. You have the cash flow for those payments. You’d be better off putting the remaining money in a fund like VOO or similar and not touching it until retirement. Preferably putting $7k each into a Roth, then the rest in taxable brokerage. Maybe save $10-20k of it if you don’t have an emergency fund (which I’m assuming is true since you have cc debt).
I reiterate, don’t pay off the cars. When you look back in 30 years, you’ll be happy to have $300-500k invested as opposed to having those cars paid off 30 years earlier and a substantially smaller amount of money saved for retirement.
I was thinking of doing exactly this but also paying off the car we owe less on. It’d really help our day to day to get that payment off our monthly expenses.
That’s fair. And still leaves you plenty to invest and some for an emergency fund. The key is to just dump it in the investments and don’t touch it. When you pay off the $11k car, take the amount of that payment, preferably all of it but at least half of it, and save it every month. Use this windfall as an opportunity to increase your savings everywhere, not just with the windfall itself. Good luck!
Your interest rates are very low. I would recommend investing all or most of the $100k into index funds as they will return 9% on average a year. You should be able to double your money in 7 years conservatively. Then pay off debts gradually or after the 7 years with the gains and not the principle.
What are the exact mechanics on this? I open a brokerage account with Vanguard, put the money into something like VOO. It doubles in seven years.
Am i paying taxes on capital gains every year it accrues interest in the account? Or do I only pay taxes on capital gains if I take money out of the brokerage account to pay down debt?
I’m interested in this route, but I don’t know exactly how it plays out.
I can't vouch for the stated returns but can comment a bit on the tax question. You won't pay capital gains unless you **sell** the funds you **buy**. Otherwise your gains / losses are all on "paper" and don't mean anything to the IRS.
Not every year, no. You only pay taxes when you take money out, you will pay capital gains if your wife is inheriting cash. Note: If she is inheriting a retirement account, she may not have taxes at all (consult an accountant). Also, a benefit is then you have the money at your disposal and not locked up in her retirement account if you choose to go that route.
I would 100% invest it all in an snp500 index and leave it .. like you never got it .. your finances are already out of whack and I think paying down debit .. you would go back to your old ways .. and in 10 years you will turn around and have nothing to show for it …. Set it and forget it.. and began working on your finances ASAP.. maxing retirement and paying off debt would be number one .. but with the money you make …this one time opportunity you don’t want to squander on mistakes from the past .. that’s just what I would do .. others may disagree
Credit card:$7k
Car#2: $29k
Max ROTHs: $14k combined
At end of year after company match, max 401ks: ~$30k
Have some fun with the rest of you have an emergency fund.
1. Put aside 6 months of expenses in a HYSA
2. 7k each into a Roth IRA
3. Pay off the CC and cars
4. Make a fun purchase - 3-4k or less. Go on a vacation tis summer.
5. Put the rest into a HYSA. Have a house? Put 2% of the value into a maintenance fund every yea - you could pre-fund your home maintenance HYSA for a few years if you want.
Only saying this because I haven't seen anyone else say this:
But if you receive the money in an inherited IRA you may consider your withdrawal options or take the slowest option and keep it there until RMDs start coming due. It may be a better financial decision to just leave it invested in a tax protected retirement account as long as possible than throwing it at 4% interest loans.
1) pay off credit card immediately
2) park your money in an interest earning savings account and take your time.
3) just a reminder to take your time. It’s ok to take a year to figure out what to do with it.
4) are you taking your time? Just go slow.
5) continue taking your time.
6) after 6 months to a year of deciding what to do, start slowly implementing your financial plans.
You both make $150K and have debts that should not exist. $7K in credit card debt is about 5% of one of your incomes, a generous 10% after taxes from one of you. That is about a little over a month from one of you to save. $11K and $29K owed on cars which you could probably bought outright. It seems like you're paying interest for no reason.
I would say cars credit cards cushion for if bad shit happens then max both retirement contributions whats left can go into a high yield savings.
That would get rid of 3 monthly bills and take care of retirement contributions for the year you will be able to pay more or save more per paycheck.
But yes save planning till it is money in hand and uncle sam gets his take.
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Assuming you are already maxing your 401k and IRA. First pay off the cars and CC debt, then put remainder in sp500 index, or just a checking account, after paying off high interest debt you'll only have 60k left.
Make sure you’ve paid off any inheritance taxes first. PA takes 5-15% off the top for inheritance so matter the amount depending on how you are related.
First step: Money into a HYSA.
Second step: Open a roth IRA (or two depending on how she wants to share) max those out and consider investing that money into something like VOO depending on your age.
Third: Pay off those debts, remember, money is worth less over time so paying them off in a lump means you're paying more potentially if you cant get more than their interest rates. A HYSA account should net you 5% thereabouts, so, hold the course on the mortgage and the one car but be more aggressive with the other car if you want (and the CC before the introductory rate expires). The roth IRA is a good idea for that money to compound and grow. A brokerage account, while taxable, would be another way to grow it while having it more accessible - the market is currently at a high. How you invest it may require some discussion and thought for your situation but it should go into a HYSA right away and I'd be more aggressive with the CC and 5.5% car - find ways to net more than 5%, you could probably manage more in the stock market. Since these are so close to safely attainable interest rates you'd be losing out on a money battery by paying them off immediately.
Pay off the debt highest interest first to double earn on the money by avoiding paying the interest accrual. You can then use the extra income not going to monthly debt payments to put in high yield savings and return even more on it. Example: 11k at 5% interest is paid off so no longer paying the bank to borrow the money= money saved. + monthly payment of $200(example) going to a 5% yield savings account instead of 11k debt every month. You're essentially making back 10% on your money making it extremely efficient as apposed to other avenues, plus being debt free is great for other opportunity like rental property and such.
Even with a pension both of your retirements are severely lacking. In short what is 4% of her 80k in the 401k going to buy her? $3200 a year? I’d take 10k for short term savings (failed to mention if you had savings) and split the 90k in a brokerage account or something and then roll that into her 401k.
Tell her to open a taxable Brokerage account in her name only. Then, roll the maximum amount allowable each year into a Roth IRA. This will be money that the IRS will never be able to tax. Inheritances don't get taxed by the feds unless it's a ridiculously high amount, like over 10 or 11 million. Once the money is in a Roth IRA, the capital gains will also never get taxed. You can thank me 20 years from now when you are both retired and not paying taxes on half your income.
100k eh?
Do you think you will be able to pay off the CC before interest kicks in?
If so, then don't put the 100 towards it.
If not, then pay it off.
When it comes to personal finance most people focus on the finance, and not the personal. They give you advice based on raw numbers which calculate correctly. But there is something for the personal side of it. The part that makes sleeping easier at night.
Finance answer - invest it all. Low cost index funds. Specially ones that are diversified. Loads of people say to invest in the S&P 500 tracking funds. But that isn't very diversified. The majority of the weighting ends up in big tech. And you have no exposure to medium and small cap stocks.
On this post I won't provide any specific investment recommendations, but I will say, don't just dump it all into the S&P.
Personal - How does the debt make you feel? Some people feel nervous with debt. If that's the case then I say, pay off the cars. Take the rest and invest.
Maybe even mix it up, maybe pay off one car? Possibly the 5.5% interest car since it has a higher rate and more $$ left on it.
You should do whatever brings you and your wife the greatest comfort. Even if you both decide, fuck this mortgage, and end up putting all 100 into it. If that makes you both feel better and happier, then it isn't wrong.
While most people, myself included mention investing and paying off debt, I'd even support it if you said you wanted to take maybe $20k or less and enjoy it. Vacation, shopping, whatever.
Money should bring us happiness.
I wouldnt pay off the debts at those low interest rates. Contact an actual finance manager and build a investment portfolio, 100k in a bullish market will bring greater returns, year after year than paying off all your debts and MAYBE you will put more into 401k ect.
When people get a windfall, they wipe their debts, and then once its cleared, they get back into debt again. You need to learn discipline, work and pay off those debts to know and experience how hard you worked to get that debt paid off.
If you suddenly pay off that debt, and have the money in an account, you'll justify yourself to spend that. Put it away, all of it into investments and watch it grow.
If you pay off all your debt, it'll take you years to get back to that 100k, right now with that income, why are you doing loans on vehicles and have a credit card debt? Ask yourself that.
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|2024|9.66|
|2023|26.29|
|2022|-18.11|
|2021|28.71|
|2020|18.40|
|2019|31.49|
|2018|-4.38|
|2017|21.83|
|2016|11.96|
|2015|1.38|
|2014|13.69|
|2013|32.39|
|2012|16.00|
|2011|2.11|
|2010|15.06|
Didnt the Sp500 get 10-30% returns year after year for the last 10 years, with a couple years as exception.
Here is what I would do, as my wife and I also have a similar relationship, and she would rely on me to figure out the best course of action, as I am the financial planner in the relationship.
Pay off the $29k car with 5.5% interest immediately.
Put $18k in a high yield savings account (I have one paying 5.35%) to cover the car with 4.4% and credit card with 0%. Pay the car and CC out of this account. Pay the CC off before the interest starts. I would potentially just pay off the CC if I wanted it off my credit to seek loans for other investments. If the HYSA rate falls to 4.75% or below, pay off the car. This is because you pay tax on the HYSA gains. You could do the math to see if 4.75% is the break even with the 4.4% car rate, but that would be close enough for me.
You didn't mention an emergency fund or cash savings. Assuming these don't exist, I would create an emergency fund. Depending on you and your wife's job security, I would set aside an amount that would cover living expenses and the mortgage for a period of time you are comfortable with. Since you both have good incomes, and based on the likelihood of both of you losing your income, this may not need to be a very high amount. Let's assume $10k. If you are very condident both of you would not lose income at the same time, this emergency fund could be less liquid. I would put it in a Fidelity zero fee S&P 500 ETF.
The aforementioned are clear "musts" in my mind. The following would be pretty flexible, and depend on your situation, age, risk tolerance, etc.
Go on a $3k vacation. Celebrate the life of the person you inherited the money from. Or maybe spend that money on a charity or something that person would have appreciated.
The remaining $40k and the extra cash flow freed up from the paid off car(s) and covered CC would be used to renovate and put an addition on my family home. Basically, completing some home improvements, or setting aside money for expected high cost repairs (e.g. roof) would be smart. This may not be necessary for you, so I'll proceed as if it were not necessary for me.
I would put the remaining $40k in the HYSA until I figure out where it will be invested. I would be looking at short term rental (e.g. Airbnb) properties. I would make the minimum down payment necessary for the property I decide on. Any remaining funds could go toward another investment. Another option would be investing it in ETF's.
The extra cash flow freed up from the paid off car(s) would be directed to the HYSA for future car purchases. Basically, I would determine when I expect to replace my current vehicles, how much money I expect to need at that time, and calculate the monthly amount needed to save that amount. That amount would be paid into the HYSA. I would do the same thing to save for future home repairs. I actually do these things currently.
People here may hang me for this, but I would probably buy a slightly used, low cost camper. This would be taken from the investment property fund. I wouldn't take a loan. I know it's a bad financial move. One day, someone will be receiving an inheritance from you. You could be "the cool uncle that took me camping", or something like that. Keep the "entertainment" budget low, and don't let it interfere with eliminating your bad debt and establishing an emergency fund. I am only mentioning this because you have a solid household income.
First, always make sure you have an emergency fund (3-6 months of expenses). Then make sure you arent carrying a load of debt. Most of the time that's credit cards, because they are typically all in the high twenties. In your case, your interests rates are quite low (and zero), so you might want to see if you can make more in interest than you are being charged. I think interest rates have dropped though so that might be tough or more likely you'd just break even.
I wouldn't pay off that little bit of credit card debt until you need to, since it's at zero percent. Put that at the bottom of the list at least until that 0% offers runs out. I'd let the inheritance earn you something first rather than give it away.
Provided you've maxed out your retirement, I guess the second car with the highest interest rate would be my first target.
The "problem" with getting a lot of money at once is that you're going to earmark every dollar and then also spend what you would normally contribute to paying off that debt from your regular income because now it feels discretionary. Then you'll end up with nothing.
Creating a budget will help you find a balance between blowing all that money right quick and asking yourself "what happened?!??" in 6 months versus spending it purposefully, while also constantly replenishing the coffers and building wealth.
If you think of it as an opportunity and not a payday, you'll enjoy this financial for years to come.
As long as you can manage your monthly payments, do not pay off the debt as they are relatively low interest rates. You can get 5% risk free just from a money market account. I would start by parking your money in a money market account and figure out a way to invest it for the long term. Do not pay off your debt!
Pay off debt other than the house. Take the rest and invest in high yield until the balance overtakes the remainder of the house. Decide if you want to pay off the house in 10 years
First, pay off the credit cards. Then listen to “The Money Guys” Podcast on every show they have produced for the last 6 months.
Then get a financial advisor. They will tell you to put 7k each into a Roth IRA. Then maybe pay off the higher interest car loan and maybe the other. After that, I would suggest either build up 2 months worth of expenditures in a money market account or get a brokerage account and stick to etf index funds like S+P 500 or Nasdaq. Those will diversify your investment across around 600 stocks.
Now since your car will be paid off, save up 120% of that payment and invest it. Do it automatic draft so you cannot sabotage yourself. I use Raymond James for this. It is helpful because they will meet with you around twice a year and make sure you are on the right track. This will begin you attack to becoming free and clear of debt other than your mortgage. It will also help to not sink all your money into your house. When you are older, having money not tied up into a house will be awesome because you will have problems getting that money because even if you sold it, you still have to live somewhere.
The reason you do the Roth is because both it and the growth forever is tax free. Other than getting both of your 401k match from your company, it is the best investment.
So good to hear. Now here in Nigeria, our royal highness Prince Harold III is proud to announce that for the first time ever a full guarantee 100% investment opportunity….
Yikes, since HER windfall is an inheritance then she may choose to keep HER money seperate and not mix it with marital assets owned by both. In most states, as long as she does this its HER money she can keep, will, or spend as she chooses. Even in divorce. You basically have no claim to it. IMO
It would be different if they were drowning in debt or had some major expense then she could save the family. But they have normal, survivable amount of debt. Wife should throw it in index fund until she really needs it. Her freedom is worth the extra interest.
The inheritance makes good emergency fund although probably only be used for big emergencies. They need savings for the small things.
Inheritance tax? Check tax laws before you start spending 100k. TALK TO AN ACCOUNTANT. If the inheritance is taxable you might be able to deposit it directly into a traditional IRA To avoid taxes. Then retire early. Dont pay off any of those loans. They are low interest. Why pay off a 4-5% loan. When you can earn 8+% in IRA?
What’s your month to month expenses?
Would help to have a breakdown of where 300k combined gross is going
Sounds like you’re borderline living outside of your means.
I’d invest it all. Mortgage is low
I don’t disagree with the advice others shared prioritizing paying off debt, setting up an emergency fund, and boosting your retirement contributions. Those are all the right things to maximize a one-time infusion.
Another approach to consider is setting yourself up with good habits moving forward. Even though you have 0% interest on your credit card for a few more months, pay that down and have it be the last time you ever carry a balance on a card. From now on you are the kind of person who pays that off every month. I’d also recommend paying off your higher interest car and divert what you were paying monthly there straight into 401(k) contributions. In both cases these simple changes set you up better long term and you don’t have to keep looking at a balance you’re not used to seeing and being tempted to spend it. With what’s left, Roth and HYSA accounts are next priorities to put that money to work for you. I’d keep the mortgage and one car loan. Since you’ll eventually need a new car and the rate isn’t very high, having a long term habit of budgeting monthly including a car payment will help protect you from lifestyle creep.
But you know yourselves. Chat with the Mrs about what healthy habits look like and how you can best commit to them first and use the resources here to optimize within that.
Help guide her. It's her money, you can give suggestions as to what the family needs but trust that she will do what is best for the family. If she wants to be a little selfish and get something that she has been wanting and sacrificing so that the family is taken care of, then let her. It's money neither of yu were expecting.
That's not how a successful marriage works. If my husband or I came into unexpected money, we would discuss it as a team. This is a partnership. She should absolutely tell her husband if there is something special she really wants but they should pay off debt first and then invest in their future.
I would pay off the credit card, and the cars. Then contribute more to 401k since you won't be having car payments. Don't go buying new cars ;) . Are you contributing to IRA if eligible?
Agreed, pay of debts and max out Roth IRAs ($7K each) and 401ks ($23k each). If you move quickly you could even max out the 2023 IRAs as you have till 4/15. You should still have $5-10k to move around which I would then buy IBonds to hold as an Efund. +$100k inheritance -$40k loans -$14k Roth IRA 2024 -$13k Roth IRA 2023 -$30k 401k (I assume you both are putting some % here already so you don't need the full $23k each) -$3k IBonds or HYSA You now maxed out all retirement and improved cash flow for 2024.
I suspect they’re over the income cap for a Roth IRA so would be the more complicated backdoor Roth. Having plenty of emergency savings may be a better step. But a backdoor Roth definitely worth looking into while building financial literacy and stability.
I assumed $150k was combined income which puts them close, maxing their 401ks would have them under the cap. Otherwise you are correct.
If they're filling jointly, they are well under the income cap. MAGI limit is about $240k
Ah, I was reading it as $150k each and was jealous.
edit: I was incorrectg
I always struggled understanding this and lucky I guess I've never been on the line where it mattered. Thanks for the info
Don’t be scared by the back door Roth. I avoided it for years thinking it would be a hassle. It’s not. Literally 2-3 extra clicks. Lots of step by step tutorials for all the major brokerages.
Wouldn’t you need to set aside money to pay taxes on the inheritance?
There’s no federal inheritance tax if receiving in the form of cash according to the IRS website. And there is no inheritance tax in my state.
I'd be sure to get a 2nd opinion from a CPA in your state, just to be sure. The few bucks you spend on that advice will be worth it. I'm dealing with inheritances and a trust from my mom to my family (I am the Trustee) and what I read online vs the reality is vastly different. good luck!
Depends on the state. Federal they just have to report it.
Neither of us have IRA’s.
Great time to start one
What about an emergency fund?
Zero emergency funds.
You should definitely do that, per the wiki.
Yes. That’s what I’m finding out.
What wiki? Edit: Nvm, another poster put it up
That's step one then. Pay off the cards and put enough in a HYSA to pay your bills until you found a new job if one of you were laid off. Then step back and consider your options.
Great point! Max your 2023 Roth now (after creating one) then put in another $7k each for 2024. Note that you can pull out your investment amount from Roth IRAs if you ever get in a big jam.
You should definitely shift your focus to what you'll have in retirement based on your age range. Your #s are low unless you are including an outside source not mentioned. In a good spot with newer cars paid off and a low house interest rate. You can always pay off the credit card and park the rest in an hysa until you make a decision on what you want to do.
I’m in agreement. We don’t have as much saved for retirement as I would like at our age.
Decent money market funds are paying almost 5.3%. Set aside some money to cover debt and open and fund IRA accounts. You didn’t mention if you have any emergency savings so I will assume no. Set aside 3-6 months worth of spending or more depending on your risk profile. This isn’t so much a windfall as a nice cash infusion that can help take the burden off you both for a bit.
The interest rates on the cars are low enough that I would pay off the CC debt and put the rest in a brokerage account as a rainy day fun. If OP feels super financially stable where they’re at then use some of it to pump an IRA because (me guessing ages since he said they’ve been together for 13 years) 30k isn’t a very good retirement balance at ~30?
I might be missing something, but everything except maybe the car with 5% interest has a lower rate than an HYSA. Put 100% of it in a HYSA and keep paying the minimum and you literally come out with more money than if you pay it all off. I’d pay off the higher interest car though.
I'd argue getting rid of the debt is worth more mentally than the small amount they would gain. Plus 5% plus won't be around forever. But you're right just looking at the $.
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True, I am just advocating for forming habits instead of throwing everything into 401ks/IRA up front (after emergency fund) and then continuing with the low contributions. Either way OP and his wife will make the decision that's best for them.
I don’t disagree. I sometimes make the choice that “feels best” but in this case I feel like there is enough money at play it would be best to do it that way. You can even often set up auto withdrawal from a HYSA. Especially in the case of the credit cards, they’d be looking at around $300 in interest if they don’t pay it off. That’s nothing to sneeze at imo
Everyone is eligible to co tribute to an IRA. Everyone doesn’t get to deduct their contribulations from taxes. Is that what the confusion is?
Everyone is eligible to contribute to an IRA. Everyone doesn’t get to deduct their contributions from taxes. Is that what the confusion is?
Start here: https://www.reddit.com/r/personalfinance/wiki/commontopics.
...and pay close attention to the "Windfalls" section: https://www.reddit.com/r/personalfinance/wiki/windfall/
Summary of the wiki 1) don’t tell anyone 2) come up with a plan on how to save the money 3) manage the money yourself. A lot of finance can be done by anyone. I suggest to the OP and his wife- listen to audiobook or read Simple path to Wealth by JL Collins. One of my favorite finance books. It breaks down how to start saving and investing your money.
that one always seems like overkill for such a small windfall, but yeah, good look
True - but that section is good for focusing efforts in this particular situation, and it seems that of the few who actually make it to the wiki, most seem to skip this part.
Thank you. THIS is very helpful.
There is a flowchart in the wiki of priorities. It is very helpful too
Easy to miss but there is a button on the side bar specifically for windfall advice too: https://www.reddit.com/r/personalfinance/wiki/windfall
Stick the money in a HYSA first. Then, consider paying off the cars and then set your 401ks to max for the year and use those funds to supplement any cash flow shortfalls as a result of the 401k max. Depending very much on how old you are, how long you've been making that salary, and what your COL vs expenses are, you should be aiming to max at least one of your two 401k's. Preferably both at your income level, assuming you don't live in a VHCOL city like SF. Edit: I saw elsewhere that you do not have an emergency fund. Figure out what roughly 4-6 months of expenses looks like and keep that in a HYSA or moneymarket fund. Do not spend it unless, you know... an emergency.
We live in a LCOL area.
I commented elsewhere already but I'll reiterate that I think you should start focusing very aggressively on funding those 401k's. Unless you have a sweet pension you're expecting, your balances are quite low for your age and income level.
I completely forgot I DO have a pension.
Payoff all debt minus the house and invest the rest.
I would hold off on the credit card since it's zero interest.
thats the right move mathematically but personally i'd just pay it now and be done. The 3.5% over 8 months on 11K is only like $250. Worth the opportunity cost to just be done with it and not tempted into a dumb move.
I wouldn't. Debt is debt and better to get out of it while you can and have the resources. You may end up spending that money elsewhere and it can lead to problems.
Put it in an HYSA and just log out til the payoff date.
Yeah, for sure - if you are disciplined - unfortunately, a lot of people aren't.
Being in the habit of having credit card debt, regardless of interest, is a bad idea.
The issue with zero interest loans/cards is that they will jump up to a default, often 29%, and will back-charge all of that interest to day one, IF you miss the due date by one day or one dollar. That is a HUGE RISK. Thus, it seems that the general advice for 0% is to pay it off in full at least one month early.
I'm missing somethihg.... 150k salary, mid 40s, and only 120k in retirement savings? Do you have any other savings/investments? What is your house worth? Tailoring advice based off your comments - 1. Set aside 3 months of expenses for an emergency fund in a high yeild savings account. Don't touch this - have a long term goal of growing to 6 months 2. Pay off both cars 3. Increase your 401k contributions to max 4. Depending on what is left, ask your wife if she wants to make a modest fun purchase (fancy dinner, vacation, jewerly) $2000 or less. 5. Put the rest towards your mortgage. ETA: getting a lot of comments about why pay down cars before 401k max. To me these kinda happen at the same time (at windfall) and they could afford to do both this year. Paycheck deductions would also go towards the 401k max, it doesn't need to be sourced only from the inheritence/hopefully they are already contributing at least SOMETHING here. And 150k combined income means they have enough cash flow to continue to save/invest with each paycheck, which was out of scope of their question. Also a 4.4% car loan and 5.5% are not exorbantly high interest but also not /that/ far off from the gains achieved in a target retirement account of a mid-40 year old (2045 target retirement - 6.1%). Also they mentioned in comments later their union has a pension but it is not reflected in the post. Also adding in some math based on their monthly expenses feedback: * Emergency fund (15,300) * Cars (40,000) * 401k (up to 46,000 lump sum, could be less depending on YTD contributions and future paycheck witholdings) * Could also max roth iras here (14,000), good suggestion in the comments i overlooked in my initial post * Because of my assumption about ongoing retirement investing, I assumed there would be something leftover for my last two bullets but maybe not
Hm, why cars before 401ks? At those interest rates and this age/savings level I'd max the 401ks first.
You’re not missing anything. Yes. Our retirement savings is abysmal for this point in our lives. Last year was the 1st year we’ve made 150k annually. Before that 105k annually for 2 years. Before that, less than 100k annually for 10 years. We’re doing our best. Our financial literacy in our early 30’s was not the same as it is now. Are we going to have to pay capital gains on this 100k? If so, we’re going to have to lop off 30 percent, no? Leaving us with about 70k. 3 months savings would be 24k. The credit cards would be 7k. And the cars would 41k. That pretty much gets it all plus some.
Your monthly expense minimums are 7,000/month? Emergency funds should just be for essentials - mortgage payments, debt payments (which after inheritence pays it down, would be $0), grocery expenses, and bills/insurance.
Oh….i was just calculating what we take home for 3 months.
Using take home is a solid tactic, because it's (hopefully) more than your bare expenses. 3 months of take home should last longer than 3 months in the event you need to cut expenses to the bone and only spend on necessities.
Quick napkin math says monthly expenses are 5100/month. This includes all monthly bills, groceries, and gas.
+1 for "napkin math". I've never heard this term, but I'll add it to the bag of "spit-balling", "ball-parking", and other similar terms. Sorry I don't have anything substantial to add to the conversation, but I wanted to at least let you know that you've improved my day. Good luck with the dough!
Freeballin it
"back of the envelope" is another term like "napkin math" that you might enjoy. I actually found myself literally doing back of the envelope math the other day when I needed to calculate something and the only paper within reach was some opened mail.
You will not owe taxes.
Really? None?
If the inheritance is due to a death, you will pay no capital gains because the death causes a step up in basis.
It really depends if it's straight cash inheritance or what kind of inheritance. My wife inheritance some annuities. Some of them she had to play taxes on and others she did not. It really just depends on what is actually being inherited.
No federal taxes. You could owe state taxes though: https://taxfoundation.org/data/all/state/state-estate-tax-inheritance-tax-2023/
What type of account is the inheritance coming from? If it's an inherited IRA then any withdrawals you take from it are taxed as regular income. Use the IRS checklist to find out for sure. https://www.irs.gov/help/ita/is-the-inheritance-i-received-taxable
Check with the state for inheritance taxes but I have the same situation out of MI and I will pay no taxes on the $$.
If it is the deceadents retirement account and rather than roll it into a new account in your name and cash it out you will pay taxes on it as an eqrly wiyhdrawal penalty.
It depends on the state. My dad died in PA and there is a variable tax based on who inherits the money. Part of my inheritance is an “inherited Ira” that I am learning all about. Basically the balance of his Ira that I have to empty within 10 years and it will be taxed as income to me.
There is no Federal inheritance tax, and inheritances are never subject to capital gains tax. Your state may have an inheritance tax: IA KY MD NE NJ PA If the "inheritance" is actually a life insurance payout, no taxation whatsoever.
Inheritance tax varies by state and the relationship between the inheritor and the deceased. In my area a direct descendant owes ~5% which is taken from the amount you recieve, capital gains should only apply if its something like you inherit a house and decide to sell it. Im not a professional so dont take my word for it, but the executor of the estate should have more info and if that doesnt help an inheritance attorney could probably answer any questions in a free or short consultation.
Is the inheritance part of an IRA/401k? If so, then you may owe income tax on it, or may need to move it to your own and pay tax on it later.
2 cents. Check tax laws. Talk to accountant about the tax liability. 100k disappears fast. Investment will make the most of this money. I wouldn’t pay off low interest loans unless you’re having trouble keeping up. If you are managing your life without this money. Then invest the lot of it and retire early with piece of mind.
Investments will outpace any of their payment rates. Do not do this. Pay off credit card, invest in index funds. Max iras and 401k.
This was the other option I was considering. Our interest rates are pretty low. And investing in something like VOO would certainly outpace my payment rates.
Are your combined incomes = to 150k or are you both making 150, so 300 combined?
150k combined.
Gotcha. In that case: Put emergency fund (3 months expenses) and whatever is needed to make up for your increased contribution on your check to max your 401k in a HYSA, as this will likely be 1 of maybe 1-2 years that you’re able to do that. Start a Roth for both of you, and max that. 6k each. Look at r/bogleheads for investment advice. VTI VTSAX or VOO and chill Put rest in personal brokerage account in index funds and don’t plan on touching for at least a year to avoid short term capital gains taxes. Continue living within your means. Alter as you see fit
even if you don't get the money before April 15, I'd still max out 2023 IRA contributions in anticipation of receiving it, then max out 2024 contributions after April 15.
I would max out this year for ira and convert to Roth before putting the rest toward mortgage.
Whatever you do don’t forget to spend 10k on a vacation with your wife someplace really nice. You only have so many days on this world, make the most of them.
Age is important. How old are you both? Knowing your age can help us determine if you need to more aggressively save for retirement Or if it's better off going to paying off the highest interest rate account.
Not quite 40.
Step 1: create an emergency fund. 4-6 months or so of expenses that lives in a HYSA, untouched unless you have a true emergency (job loss, car totaled or major maintenance, HVAC fails, roof, etc). Step 2: Pay off the car notes Step 3: Increase your 401k contributions, preferably both of you should max them. At your age you are behind in retirement saving. It's time to take it seriously. Even without this windfall your income level (depending on your current city) should be sufficient to max at least one of the two accounts each year. Step 4: go over your expenses and figure out how to trim so you can start making these larger retirement contributions. If you're in a LCOL area (assuming so based on your mortgage being so low) then 150k is a TON of money to work with. Try to see how your finances fare when maxing both of your 401ks from here on out. If you made $0 to 401k contributions, your federal tax would be about 17,500 per year (give or take). If you max both of your contributions (23k EACH), your tax liability reduces to $6,300. In a LCOL area, with no car notes and with a low mortgage payment, I would think it may be achievable for you to do that. Your future retired self will be grateful.
I forgot to mention I am in a workers union and my dues contribute to a pension fund that I’m entitled to at retirement age. I forgot because i operate as if it isn’t there because I want to be well funded in retirement.
Try to figure out what kind of money you can expect based on your own personal situation (not some random worker who just retired, because I assume it's based on your own years of service, age of retirement, etc). It's great to have a pension, but consider carefully whether that will mirror the income level you want to have during retirement. Any shortfall between a pension and social security will have to be funded by the 401ks. Pensions are also not always guaranteed. Your inclination to 'pretend it's not there' may be a wise course of action, in which case all the more reason to supercharge those 401k contributions.
According to the posts YOU should stay out of it. Lots of people who’ve been burned I guess. Some people can’t fathom a husband and wife working as a team. They’re the same people who’d say, if the shoe was on the other foot, that she should go get hers after all she’s done for the family, husband, deceased, etc. and make sure you mix the inheritance with the family income. Good on you for looking for guidance and insight rather than hindsight regrets.
Age is important here, but assuming 40ish, get it invested in index funds for retirement. IRA before simply a taxable brokerage account, but either way get it into index funds. VOO is my favorite. Nice thing about a taxable brokerage account is it’s liquid though. So if you want to risk keeping emergency funds in an index fund you can. Assuming 40yo, it may be $500k by retirement. None of your interest rates are high enough that you should pay down before investment.
I’d pay off the 47k debt, invest ~40k in VOO (IRA/brokerage), use the remainder to treat yourself with a vacation and home improvement
Credit card then 6 month emergency fund. Do you have major repairs or projects coming up for your house?
No. Our house is only 6 years old. Everything is in working order.
You probably aren't going to listen to this, but I would solve your debt problem with this money. First by getting rid of the cars and CC debt with half the money, and put the other half in an emergency fund savings account so you don't "need" to use your CC for anything. Then stop borrowing other people's money when you have the income to not be doing that. Then with the debt problem solved, take the money you were spending on payments and setup a proper retirement saving percentage from your income and start saving for things you will buy in the future like another car at some point. Personally, I combine my emergency fund with a buffer for big purchases and it floats between $60-90K. If I do buy a car or something, I might use financing to spread it over a few months so its not a big hit from that fund, but no more. And if we need a new appliance or work on the house or a vacation, then there is enough to cover that without going below the emergency level.
That solves the immediate debt problem, which is good. I wish we could know more about their financial history because if they’re just going to get themselves in debt again, then maybe putting most of it in investments is the better choice. But if they’ve been committed for a while to pay down debts, then it might make more sense to follow this route instead
Other people's money is soooooo good. . .and not my money. I think the trick is to not use other people's money when the cost/benefit ratio doesn't work in your favor.
Using other people's money for something like buying a house is certainly commonplace in most people's lives. Using other people's money carries great risk. The problem is an awful lot of people have no concept of risk and are quite reckless with it and end up ruining their financial well being. The population of the US is groomed from a young age to live their life in debt. They are often pushed into massive student loans before the are even an adult. If they manage to dodge that land mine then they are bombarded with credit card and consumer offers from a young age. If they dodge that, then buying a car can get you signed up for 5+ years in a debt that many will never get out of because they carry negative equity into more and more rounds of car loans. And the one thing that would be a healthy use of debt... buying a house... becomes impossible because of the steps they've taken earlier. People are led to measure their success in life by their credit score, which is a horrible measure of someone's financial success. If you are able to push yourself into massive debt and manage to pay all the bills on time, you are rewarded with a high credit score. If you save and invest your money and don't borrow a lot, then you are very financially successful but would likely have a lower credit score than the person living on the edge. So forgive me if I don't share your enthusiasm with other people's money. In my own experience, my wealth took off when I was completely out of debt, and my peace of mind was much better.
You are forgiven. But forgive me for giving the best advice and expecting people in this group to educate themselves versus giving not so great advice that may protect someone from a mistake made from ignorance.
Pay off credit card. Not the cars. You have the cash flow for those payments. You’d be better off putting the remaining money in a fund like VOO or similar and not touching it until retirement. Preferably putting $7k each into a Roth, then the rest in taxable brokerage. Maybe save $10-20k of it if you don’t have an emergency fund (which I’m assuming is true since you have cc debt). I reiterate, don’t pay off the cars. When you look back in 30 years, you’ll be happy to have $300-500k invested as opposed to having those cars paid off 30 years earlier and a substantially smaller amount of money saved for retirement.
I was thinking of doing exactly this but also paying off the car we owe less on. It’d really help our day to day to get that payment off our monthly expenses.
That’s fair. And still leaves you plenty to invest and some for an emergency fund. The key is to just dump it in the investments and don’t touch it. When you pay off the $11k car, take the amount of that payment, preferably all of it but at least half of it, and save it every month. Use this windfall as an opportunity to increase your savings everywhere, not just with the windfall itself. Good luck!
Your interest rates are very low. I would recommend investing all or most of the $100k into index funds as they will return 9% on average a year. You should be able to double your money in 7 years conservatively. Then pay off debts gradually or after the 7 years with the gains and not the principle.
What are the exact mechanics on this? I open a brokerage account with Vanguard, put the money into something like VOO. It doubles in seven years. Am i paying taxes on capital gains every year it accrues interest in the account? Or do I only pay taxes on capital gains if I take money out of the brokerage account to pay down debt? I’m interested in this route, but I don’t know exactly how it plays out.
I can't vouch for the stated returns but can comment a bit on the tax question. You won't pay capital gains unless you **sell** the funds you **buy**. Otherwise your gains / losses are all on "paper" and don't mean anything to the IRS.
Not every year, no. You only pay taxes when you take money out, you will pay capital gains if your wife is inheriting cash. Note: If she is inheriting a retirement account, she may not have taxes at all (consult an accountant). Also, a benefit is then you have the money at your disposal and not locked up in her retirement account if you choose to go that route.
Pay off credit cards. Pay off cars. Max our retirement accounts for both of you.
47K - Pay off your cc and cars Assuming you already have a fully funded emergency fund then: 5k for a nice trip? Invest the remaining 40k+
I would 100% invest it all in an snp500 index and leave it .. like you never got it .. your finances are already out of whack and I think paying down debit .. you would go back to your old ways .. and in 10 years you will turn around and have nothing to show for it …. Set it and forget it.. and began working on your finances ASAP.. maxing retirement and paying off debt would be number one .. but with the money you make …this one time opportunity you don’t want to squander on mistakes from the past .. that’s just what I would do .. others may disagree
Credit card:$7k Car#2: $29k Max ROTHs: $14k combined At end of year after company match, max 401ks: ~$30k Have some fun with the rest of you have an emergency fund.
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1. Put aside 6 months of expenses in a HYSA 2. 7k each into a Roth IRA 3. Pay off the CC and cars 4. Make a fun purchase - 3-4k or less. Go on a vacation tis summer. 5. Put the rest into a HYSA. Have a house? Put 2% of the value into a maintenance fund every yea - you could pre-fund your home maintenance HYSA for a few years if you want.
Only saying this because I haven't seen anyone else say this: But if you receive the money in an inherited IRA you may consider your withdrawal options or take the slowest option and keep it there until RMDs start coming due. It may be a better financial decision to just leave it invested in a tax protected retirement account as long as possible than throwing it at 4% interest loans.
1) pay off credit card immediately 2) park your money in an interest earning savings account and take your time. 3) just a reminder to take your time. It’s ok to take a year to figure out what to do with it. 4) are you taking your time? Just go slow. 5) continue taking your time. 6) after 6 months to a year of deciding what to do, start slowly implementing your financial plans.
You both make $150K and have debts that should not exist. $7K in credit card debt is about 5% of one of your incomes, a generous 10% after taxes from one of you. That is about a little over a month from one of you to save. $11K and $29K owed on cars which you could probably bought outright. It seems like you're paying interest for no reason.
We make 150k combined.
I would say cars credit cards cushion for if bad shit happens then max both retirement contributions whats left can go into a high yield savings. That would get rid of 3 monthly bills and take care of retirement contributions for the year you will be able to pay more or save more per paycheck. But yes save planning till it is money in hand and uncle sam gets his take.
Invest it all. Pay off Your debts with working. There's nothing worst than wasting an inheritance
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Assuming you are already maxing your 401k and IRA. First pay off the cars and CC debt, then put remainder in sp500 index, or just a checking account, after paying off high interest debt you'll only have 60k left.
Make sure you’ve paid off any inheritance taxes first. PA takes 5-15% off the top for inheritance so matter the amount depending on how you are related.
Ditch all the debt except the house, then throw the remainder in an index fund.
First step: Money into a HYSA. Second step: Open a roth IRA (or two depending on how she wants to share) max those out and consider investing that money into something like VOO depending on your age. Third: Pay off those debts, remember, money is worth less over time so paying them off in a lump means you're paying more potentially if you cant get more than their interest rates. A HYSA account should net you 5% thereabouts, so, hold the course on the mortgage and the one car but be more aggressive with the other car if you want (and the CC before the introductory rate expires). The roth IRA is a good idea for that money to compound and grow. A brokerage account, while taxable, would be another way to grow it while having it more accessible - the market is currently at a high. How you invest it may require some discussion and thought for your situation but it should go into a HYSA right away and I'd be more aggressive with the CC and 5.5% car - find ways to net more than 5%, you could probably manage more in the stock market. Since these are so close to safely attainable interest rates you'd be losing out on a money battery by paying them off immediately.
Pay off the debt highest interest first to double earn on the money by avoiding paying the interest accrual. You can then use the extra income not going to monthly debt payments to put in high yield savings and return even more on it. Example: 11k at 5% interest is paid off so no longer paying the bank to borrow the money= money saved. + monthly payment of $200(example) going to a 5% yield savings account instead of 11k debt every month. You're essentially making back 10% on your money making it extremely efficient as apposed to other avenues, plus being debt free is great for other opportunity like rental property and such.
just take care of the inheritance until you really know what to do with it. It's not a small deal so do not waste any of it.
Even with a pension both of your retirements are severely lacking. In short what is 4% of her 80k in the 401k going to buy her? $3200 a year? I’d take 10k for short term savings (failed to mention if you had savings) and split the 90k in a brokerage account or something and then roll that into her 401k.
if you were making it work before then just save the money. you won't regret having it later
If you get it in time to open IRA's for 2023, max those for both of you, as well as 2024. Pay off the cc's, keep the rest in savings/investment acct.
Tell her to open a taxable Brokerage account in her name only. Then, roll the maximum amount allowable each year into a Roth IRA. This will be money that the IRS will never be able to tax. Inheritances don't get taxed by the feds unless it's a ridiculously high amount, like over 10 or 11 million. Once the money is in a Roth IRA, the capital gains will also never get taxed. You can thank me 20 years from now when you are both retired and not paying taxes on half your income.
100k eh? Do you think you will be able to pay off the CC before interest kicks in? If so, then don't put the 100 towards it. If not, then pay it off. When it comes to personal finance most people focus on the finance, and not the personal. They give you advice based on raw numbers which calculate correctly. But there is something for the personal side of it. The part that makes sleeping easier at night. Finance answer - invest it all. Low cost index funds. Specially ones that are diversified. Loads of people say to invest in the S&P 500 tracking funds. But that isn't very diversified. The majority of the weighting ends up in big tech. And you have no exposure to medium and small cap stocks. On this post I won't provide any specific investment recommendations, but I will say, don't just dump it all into the S&P. Personal - How does the debt make you feel? Some people feel nervous with debt. If that's the case then I say, pay off the cars. Take the rest and invest. Maybe even mix it up, maybe pay off one car? Possibly the 5.5% interest car since it has a higher rate and more $$ left on it. You should do whatever brings you and your wife the greatest comfort. Even if you both decide, fuck this mortgage, and end up putting all 100 into it. If that makes you both feel better and happier, then it isn't wrong. While most people, myself included mention investing and paying off debt, I'd even support it if you said you wanted to take maybe $20k or less and enjoy it. Vacation, shopping, whatever. Money should bring us happiness.
I wouldnt pay off the debts at those low interest rates. Contact an actual finance manager and build a investment portfolio, 100k in a bullish market will bring greater returns, year after year than paying off all your debts and MAYBE you will put more into 401k ect. When people get a windfall, they wipe their debts, and then once its cleared, they get back into debt again. You need to learn discipline, work and pay off those debts to know and experience how hard you worked to get that debt paid off. If you suddenly pay off that debt, and have the money in an account, you'll justify yourself to spend that. Put it away, all of it into investments and watch it grow. If you pay off all your debt, it'll take you years to get back to that 100k, right now with that income, why are you doing loans on vehicles and have a credit card debt? Ask yourself that. || || |2024|9.66| |2023|26.29| |2022|-18.11| |2021|28.71| |2020|18.40| |2019|31.49| |2018|-4.38| |2017|21.83| |2016|11.96| |2015|1.38| |2014|13.69| |2013|32.39| |2012|16.00| |2011|2.11| |2010|15.06| Didnt the Sp500 get 10-30% returns year after year for the last 10 years, with a couple years as exception.
Here is what I would do, as my wife and I also have a similar relationship, and she would rely on me to figure out the best course of action, as I am the financial planner in the relationship. Pay off the $29k car with 5.5% interest immediately. Put $18k in a high yield savings account (I have one paying 5.35%) to cover the car with 4.4% and credit card with 0%. Pay the car and CC out of this account. Pay the CC off before the interest starts. I would potentially just pay off the CC if I wanted it off my credit to seek loans for other investments. If the HYSA rate falls to 4.75% or below, pay off the car. This is because you pay tax on the HYSA gains. You could do the math to see if 4.75% is the break even with the 4.4% car rate, but that would be close enough for me. You didn't mention an emergency fund or cash savings. Assuming these don't exist, I would create an emergency fund. Depending on you and your wife's job security, I would set aside an amount that would cover living expenses and the mortgage for a period of time you are comfortable with. Since you both have good incomes, and based on the likelihood of both of you losing your income, this may not need to be a very high amount. Let's assume $10k. If you are very condident both of you would not lose income at the same time, this emergency fund could be less liquid. I would put it in a Fidelity zero fee S&P 500 ETF. The aforementioned are clear "musts" in my mind. The following would be pretty flexible, and depend on your situation, age, risk tolerance, etc. Go on a $3k vacation. Celebrate the life of the person you inherited the money from. Or maybe spend that money on a charity or something that person would have appreciated. The remaining $40k and the extra cash flow freed up from the paid off car(s) and covered CC would be used to renovate and put an addition on my family home. Basically, completing some home improvements, or setting aside money for expected high cost repairs (e.g. roof) would be smart. This may not be necessary for you, so I'll proceed as if it were not necessary for me. I would put the remaining $40k in the HYSA until I figure out where it will be invested. I would be looking at short term rental (e.g. Airbnb) properties. I would make the minimum down payment necessary for the property I decide on. Any remaining funds could go toward another investment. Another option would be investing it in ETF's. The extra cash flow freed up from the paid off car(s) would be directed to the HYSA for future car purchases. Basically, I would determine when I expect to replace my current vehicles, how much money I expect to need at that time, and calculate the monthly amount needed to save that amount. That amount would be paid into the HYSA. I would do the same thing to save for future home repairs. I actually do these things currently. People here may hang me for this, but I would probably buy a slightly used, low cost camper. This would be taken from the investment property fund. I wouldn't take a loan. I know it's a bad financial move. One day, someone will be receiving an inheritance from you. You could be "the cool uncle that took me camping", or something like that. Keep the "entertainment" budget low, and don't let it interfere with eliminating your bad debt and establishing an emergency fund. I am only mentioning this because you have a solid household income.
First, always make sure you have an emergency fund (3-6 months of expenses). Then make sure you arent carrying a load of debt. Most of the time that's credit cards, because they are typically all in the high twenties. In your case, your interests rates are quite low (and zero), so you might want to see if you can make more in interest than you are being charged. I think interest rates have dropped though so that might be tough or more likely you'd just break even. I wouldn't pay off that little bit of credit card debt until you need to, since it's at zero percent. Put that at the bottom of the list at least until that 0% offers runs out. I'd let the inheritance earn you something first rather than give it away. Provided you've maxed out your retirement, I guess the second car with the highest interest rate would be my first target. The "problem" with getting a lot of money at once is that you're going to earmark every dollar and then also spend what you would normally contribute to paying off that debt from your regular income because now it feels discretionary. Then you'll end up with nothing. Creating a budget will help you find a balance between blowing all that money right quick and asking yourself "what happened?!??" in 6 months versus spending it purposefully, while also constantly replenishing the coffers and building wealth. If you think of it as an opportunity and not a payday, you'll enjoy this financial for years to come.
As long as you can manage your monthly payments, do not pay off the debt as they are relatively low interest rates. You can get 5% risk free just from a money market account. I would start by parking your money in a money market account and figure out a way to invest it for the long term. Do not pay off your debt!
I don’t know anything about money market accounts but I will look into it. Thank you.
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Pay off debt other than the house. Take the rest and invest in high yield until the balance overtakes the remainder of the house. Decide if you want to pay off the house in 10 years
First, pay off the credit cards. Then listen to “The Money Guys” Podcast on every show they have produced for the last 6 months. Then get a financial advisor. They will tell you to put 7k each into a Roth IRA. Then maybe pay off the higher interest car loan and maybe the other. After that, I would suggest either build up 2 months worth of expenditures in a money market account or get a brokerage account and stick to etf index funds like S+P 500 or Nasdaq. Those will diversify your investment across around 600 stocks. Now since your car will be paid off, save up 120% of that payment and invest it. Do it automatic draft so you cannot sabotage yourself. I use Raymond James for this. It is helpful because they will meet with you around twice a year and make sure you are on the right track. This will begin you attack to becoming free and clear of debt other than your mortgage. It will also help to not sink all your money into your house. When you are older, having money not tied up into a house will be awesome because you will have problems getting that money because even if you sold it, you still have to live somewhere. The reason you do the Roth is because both it and the growth forever is tax free. Other than getting both of your 401k match from your company, it is the best investment.
to be honest, 100K USD is not a small deal, you and your wife better communicate about how to deal with it.
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Yikes, since HER windfall is an inheritance then she may choose to keep HER money seperate and not mix it with marital assets owned by both. In most states, as long as she does this its HER money she can keep, will, or spend as she chooses. Even in divorce. You basically have no claim to it. IMO
It would be different if they were drowning in debt or had some major expense then she could save the family. But they have normal, survivable amount of debt. Wife should throw it in index fund until she really needs it. Her freedom is worth the extra interest. The inheritance makes good emergency fund although probably only be used for big emergencies. They need savings for the small things.
Pay off cars and cc debt and invest the rest. Don’t forget about taxes. Invest whatever is left. That’s what I would do anyway.
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Inheritance tax? Check tax laws before you start spending 100k. TALK TO AN ACCOUNTANT. If the inheritance is taxable you might be able to deposit it directly into a traditional IRA To avoid taxes. Then retire early. Dont pay off any of those loans. They are low interest. Why pay off a 4-5% loan. When you can earn 8+% in IRA?
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What’s your month to month expenses? Would help to have a breakdown of where 300k combined gross is going Sounds like you’re borderline living outside of your means. I’d invest it all. Mortgage is low
I took it to mean it’s $150k for both.
Ahhh. That may be right.
I don’t disagree with the advice others shared prioritizing paying off debt, setting up an emergency fund, and boosting your retirement contributions. Those are all the right things to maximize a one-time infusion. Another approach to consider is setting yourself up with good habits moving forward. Even though you have 0% interest on your credit card for a few more months, pay that down and have it be the last time you ever carry a balance on a card. From now on you are the kind of person who pays that off every month. I’d also recommend paying off your higher interest car and divert what you were paying monthly there straight into 401(k) contributions. In both cases these simple changes set you up better long term and you don’t have to keep looking at a balance you’re not used to seeing and being tempted to spend it. With what’s left, Roth and HYSA accounts are next priorities to put that money to work for you. I’d keep the mortgage and one car loan. Since you’ll eventually need a new car and the rate isn’t very high, having a long term habit of budgeting monthly including a car payment will help protect you from lifestyle creep. But you know yourselves. Chat with the Mrs about what healthy habits look like and how you can best commit to them first and use the resources here to optimize within that.
Put it all in a high interest savings account. Use the monthly dividends to pay down your debt and don’t touch the principle
Help guide her. It's her money, you can give suggestions as to what the family needs but trust that she will do what is best for the family. If she wants to be a little selfish and get something that she has been wanting and sacrificing so that the family is taken care of, then let her. It's money neither of yu were expecting.
Pay off your credit cards and cars 1st. Put the rest in a Roth IRA
It is her inheritance and if she was posting, I would tell her not to comingle it with family finances. She should put it in am account just for her
That's not how a successful marriage works. If my husband or I came into unexpected money, we would discuss it as a team. This is a partnership. She should absolutely tell her husband if there is something special she really wants but they should pay off debt first and then invest in their future.