Kevin's Watch

So this is the situation...

I just had an uncle (my Godfather) pass on last week. After dispersement of the will, I am going to get somewhere in the amount of $65,000 from his cash assets. This is not counting his house (paid off)) or any other assets that he has left behind. There are a total of 3 of us in the will, so of course everything beyond the cash will be split 3 ways...eventually, anyway.

Here is my question :

What would you think are my best options to do at this point?

I owe about $85K on my house, so it is not enough to pay off outright.

We do not owe anything on our two vehicles.

Our credit card debt is less than $300.00

I would like to maybe do something with $50K of this money, but short term. Six months to a year at most. I don't want to tie it up in anything that I won't be able to easily get it out of.

Knowing the wide range of various intelligence on this board...ya'll let me know what you think would be my best option.

Pay as much as you can on your house, even if it doesn't pay it off entirely (this is assuming you don't have a prepayment penalty in your mortgage). Paying nothing for where you live will free you to bank money for your kids' education, for vacations, and for whatever else you want to do.

I have been seriously thinking along those lines, but the only factor that has me leaning the other way is that I can't easily get that money back out if I need it...other than a 2nd mortgage or refinancing, something that I would not want to have to do. That is why I was maybe looking at something short term that I could get some gains on over the next 6 months to year, but not tie that money up long term.

Also, the housing market down here in and around New Orleans has no guarantees right now...especially with hurricane season right around the corner.

Cail has a compelling idea, but here is an alternative if you really feel you need liquid assets. Take the amount you want to keep liquid, and send the rest to your mortgage.
With the liquid pool, divide it into x portions, where each portion is just enough to replace one month of your total monthly income (after taxes). Place each portion of this money into its own auto-renewing CD, with the portions spaced at monthly intervals. The goal of this is to create a CD carousel, where you have one CD maturing each month of the calendar year (for 12, or you could have a carousel of 6-month CDs) so it can can either replace one month of your expenses, or it can be reinvested to be used the next time it comes around.
You get the benefit of the CD's slightly higher interest rate, but the spacing means that you never have to wait more than one month for an influx of penalty-free cash. CD rates aren't as great as they were a few years back, but the process still works for me - I have been doing this with ING CDs online for some time. I get some comfort knowing that if my job ended (I finally get fed up and walk away), I'd have guaranteed income replacement while I looked for alternatives, without immediately crunching my lifestyle.

Of course, if you follow Cail's advice, the cash you will soon be retaining once your mortgage is (very quickly) paid off can go straight to savings as well, or wherever you need it to go since it won't be pre-spent. Owning a home outright is a compelling thought. If that happened to me, I might be inclined to build a moat (if a hurricane didn't make one for me, that is)

dw

I'm sorry for your loss. Inheritance can be a very conflicted issue.

Assuming you don't want to risk it, and you only want to invest it short term, find some high-yield CDs to keep it in for a while. Or you could set up an account with some Fidelity-type place, and invest in bonds or something relatively safe, if you're up for the overhead of setting that kind of thing up. CDs earn interest income, but investments would be capital gain, and short term at that it sounds like, so ware how you want to be taxed.

Paying off your house early has many advantages to your credit profile. If you need to borrow again later your options would be wide open. And if you're worried about house prices, carefully evaluate if you prefer losing equity in a paid for house, or losing equity in a house you owe on.

If you know what you eventually will use it for, that can open other options. For example, if you think you might want to pay for the kids college, open up a education account which is not taxed. If you want to vacation every year in Nevada, think about a time share. Maybe you want to sell your house and invest the proceeds plus the inheritance into a better positioned property. Etc. Only you know what you want to do some day.

DukkhaWaynhim posted :

Place each portion of this money into its own auto-renewing CD, with the portions spaced at monthly intervals. The goal of this is to create a CD carousel, where you have one CD maturing each month of the calendar year (for 12, or you could have a carousel of 6-month CDs) so it can can either replace one month of your expenses, or it can be reinvested to be used the next time it comes around.

Now this is an interesting (no pun intended) idea.

If I would take $4000 and set that up in 12 6 month CDs as you mention, what kind of rate could I get? If only say 5%, that would only be $200 each time it comes around. Or only $2400 per year. While that is $2400 that I would basically be getting for nothing, it doesn't quite have the bang that I am hoping for...not for tying up $48000 for the year and a half before I received all of the benefits of the fist carousel of CDs.

But I admittedly have no experience or expertise on this whatsoever. Maybe that $2400 return is considered good...I just do not know.

Only you know what you want to do, J. You can take out $200 a month ... and never grow your base. Or you can put the interest back in to grow the base ... and forego a monthy income now. But get a bigger monthly income on the day you really want to start cashing out.

You can also get a monthly income with investments. More risk, but possibly more income, too. Same thing applies - grow the base, or take income out now.

WF has it right. Only you know what options work best for your situation. The idea of a CD carousel is based on the premise that you won't need the whole 48k all at once, but want better interest growth than straight savings without sacrificing all your liquidity.

If that isn't true, a carousel is a bad idea.

Plus, your math is off. $4000 in a 5% 6mo CD would only yield $100, but you then have $4100 to use as you wish after only 6 months, with the hope that you don't need it and will reinvest in the carousel. Continually reinvested, each $4000 CD will have grown to over $5000 in under 5yrs.

However, the only things that make this scenario compelling are the assumptions that your CDs rate are higher than what you get from a straight savings account, and that the term is short enough that you aren't tying up money that you might need sooner. Current CD rates are a lot lower than 5%, unfortunately.
The only way to get "more bang for your buck" is to go for much riskier things than CDs - which I am unwilling to do for a safety net.
Which brings me to a big question - what do you envision this money as? Safety net? Vacation fund? Rainy day? Slush? That ultimately determine whether/how you invest it.

dw

I'm not quite sure what I envision it as yet.

Another factor, while I am laying it all out there is this :

I am 41 years old and have no retirement savings.

So basically, I have no idea what I should do. While it really isn't that much of a 'windfall', I just don't want to screw it up. I don't want to be looking down the road 10 years from now and wondering 'what the hell ever happened to that money that Uncle Norman left me?'

Check with a financial planner, but you might consider putting it all into an IRA. At 41, it isn't too late to save for retirement, but you are no spring chicken (sorry - I'm 36 myself), and Social Security is no winning gamble for us. So, unless you expect your kids to take care of you, I would definitely look into socking that money away for retirement.
Considering what retirement vehicles your employer offers, instead of jump-starting your retirement fund with your inheritance, you could also take the money and pay down the mortgage, then save your extra take-home (that no longer needs to go toward the mortgage) straight into your new retirement fund.

dw

No retirement?

Then I'd doubly say that you'd want to get the house paid off so you have a concrete asset. Then take the money you're saving every month and look into a Roth IRA or something similar.

Ditto!

You can't pump a wad of cash into an 401K in one piece. I think the limit is like $12K per year. So paying off the house and then setting up a regiment to put a heap of cash into a 401K and a Roth after that is prudent!

I don't really have any advice to add -- these guys are good at this! -- but I would heartily second the suggestion to talk to a financial planner. Make sure he/she is an independent, tho, and not somebody who's going to make money off of you by having you purchase investments that his company sells.

Since you're not sure yet what you want to use the money for, I'd suggest parking it somewhere for starters, until you figure out for sure what it is you want to do. In that sense, buying a short-term (6-mo.) CD might be your best first move. That will buy you some time to meet with the financial planner and figure out your priorities.

One thing: if your house is paid off but you have no retirement savings, and you don't care about leaving the house to anybody, you could set up a reverse mortgage. Basically, you sell the house to the mortgage co.; they then pay you a monthly amount as long as you live -- and then when you die, the mortgage co. gets the house. This is the sum total of my knowledge on this subject, tho, so if the idea appeals to you, I would strongly suggest asking a financial counselor about it.

I'm looking at getting some $$ from the settlement of my mom's estate, as well. Sadly, I'm not debt-free, so a large chunk of the money will go toward paying the bills. But I'd already figured on setting aside some cash to create a CD ladder, similar to what DW has suggested. (And I'm hoping to squeeze out some for a really nice vacation. )

... but has anyone ever met a financial planner who didn't listen to you for a while and then suggest the mutual fund he gets a commission on?

wayfriend wrote:... but has anyone ever met a financial planner who didn't listen to you for a while and then suggest the mutual fund he gets a commission on?

Exactly. Most of those guys are shadier than a used car salesman.

I am pretty hesitant to bring money to a stranger and ask him to help me do whatever with it. They are in business to make money, and the only way that they can make money is by skimming it off of the top of what you are bringing into them to help you decide what to do with in the first place.

That's why I am valuing everyone's opinions and ideas here on this board. The more that I know, the more likely I will be to make the correct decision in the end, and without it costing me anything but a little bt of time.

I totally agree on the caveat with a financial planner. Find one that charges by the hour, and take 1-2 hours to talk about it - making sure you have done your homework before you go in. It isn't free, but for $100, their opinion is more reliable than someone constantly trying to steer you toward their commissioned products, and can get you on the path that is best for you and your goals.

Also, check with your employer - often someone at your own company can provide some advice, or at least remind you of your company-sponsored savings vehicles. Mine offers free retirement planning sessions - but these can sometimes be info-teaser sessions to try to up-sell to their full-blown (and commission-based) investment services. So, as always, be careful.

dw

First, do nothing right away. I have always read that it is best to sit on the money for a couple of months before taking any action. Let it sink in that you have the money and spend nothing. Next, talk to a reputable financial planner before you make any moves (my family has had wonderful experiences with Edward Jones). They can tell you how you can get the best bang for your buck.

Good luck to you.

If the house payment isn't a burden on you right now it may be best to let the money grow somewhere as what the old Chicago newspaper columnist Mike Royko used to call F--- You money; in case something should happen with your job, or some other unforeseen event. Just go slow and find the right financial advisor.