Dear Ms. MoneyPeace:
I received unexpected money from my uncle's estate, but not enough to celebrate and plan for an early retirement. I have a secure job, retired money, a nice apartment and a decent car. My older sister plans to add to her child's college fund with her windfall. She keeps saying I should invest.
My brother plans to buy a boat with his $ 24,000. He suggested that we both "invest" in a bigger boat and share it. This has never been a dream of mine so it's not tempting.
Am i a party killer I just don't want to make a mistake as I saw a friend dump $ 22,000 on a Harley-Davidson motorcycle when his father died and he was quick to regret it. He sold it at half price when he got tired of it.
Can I do something that will bring me peace of mind?
Frozen in Florida
Peace of mind is hard to come by, but you are on your way just by asking the question. Don't see your hesitation as a "freeze", but as a thoughtful reflection.
Inheritance is difficult. You're not saying how close you were to your uncle, but emotions must be associated with this financial decision. There is sadness, surprise, and some regret. When money is lost, impulsive decisions are often made in a slippery, precarious place, which is why widows and widowers are encouraged to do nothing important for a year. Not rushing is okay as it is easier to avoid mistakes.
Many people think that they have to do something with all an inheritance or a godsend. Then, a few weeks or months later, they forget where it went or regret it like your friend did. Or they acquire something that financially leaves them in a worse place. It's all about financial balance here.
Split the flat rate into three purposes: past, present, and future. That makes your decision easier.
Here's a strategy to get started:
What debts do you have – credit cards, personal loans, student loans, car loans. If you're one of the 39% of Americans who have used a loan to buy a car, $ 8,000 – a third of $ 24,000 – is a long way to go.
When buying a car, it's not about how low the monthly payment is, but how quickly you own the car in full. Even if you have a low interest rate, you still have a monthly payment. Reducing debt and making payments is the best way to improve your financial picture.
When you pay back your loan, you save half the previous monthly payment on the next car, even if it's 10 years away. The other half will be extra money for fun. The average monthly car payment is $ 550.
Today, make a plan for a better one: be practical and be fun. This is a two part split for your buck. They don't mention whether you have a safety account. If you're one of the 59% of adults in the United States who don't have cash to cover an emergency, this is your opportunity to build your savings.
Consider adding $ 4,000 to a safety account today and then contributing a small amount each month to help build a good saving habit.
Now that the practical is covered, think pure fun! Spend some cash on a hobby – you might want a new circular saw or a new gas grill. Set some aside for a post-Covid-19 vacation – but have fun planning your trip. Treat yourself to a new armchair or a great set of saucepans. You can enjoy this play money.
This third one is long-term: old-age or university funding. You have already retired – good for you! Since you don't mention children, your focus is on retirement.
This is an opportunity to think about your future by paying back some of the principal on your mortgage. It's very simple: no refinancing required. When you make the payment, mark it as the main payment. If you pay $ 8,000 today, you will accomplish three things:
Save money on long-term rates.
Pay off your mortgage sooner.
Increase flexibility in your retirement
Why Should You Pay Back Your Mortgage? Investments are not guaranteed. However, you are paying interest on your mortgage. That's a known amount. So if you pay back the mortgage you will save money. You are among the 37% of Americans who have paid off their mortgage faster.
If you really want to invest that money, put it in a Roth IRA, traditional IRA, or brokerage account. A traditional IRA is the only one that is cutting income taxes today. IRAs have a contribution limit of $ 6,000 unless you are over 50 years of age. (In that case, you can contribute $ 7,000.) Check with your accountant or investment advisor to make sure you qualify as you have a plan at work.
For example, Schwab, Vanguard, and Fidelity are low-cost investment providers where you can open an IRA or brokerage account. You have a number of mutual funds for your $ 8,000 annuity fund, stock index fund, or target fund that are more conservative as you age.
Finally, take 10% (or part of it if it's too rich for your blood) and make a donation higher than usual in honor of your uncle. This money was unexpected. Keeping the flow of money moving is good for everyone. Yes, you may not get a tax deduction, but this is a feel-good move. Or think of it as a thank you for the gift.
When it comes to inheritances, strategy matters. The divide and conquer strategy works regardless of whether the inheritance is $ 1,000 or $ 100,000. Good financial behavior is based on a thousand small decisions. An inheritance well invested is an opportunity for a stronger financial place and a more peaceful future.
Peace and prosperity for you,
CD Moriarty, CFP, is a MarketWatch columnist and speaker, writer, and personal finance coach. She blogs at Money Peace. You can ask questions that can be published by clicking here.