60k inheritance - invest, or pay the student loan?

[Jimbo Slice]

Hello everybody,

After receiving an inheritance my wife and I are left with a 60k remainder that is equal to the amount I have left on my private student loan at a 4% interest rate. I am at a dilemma.

A little background on our situation:
- Wife and I are both 28 and make ~$80k per year combined.
- No kids, but a desire in the near future.
- Renters, but would also like to own a home in the near future.
- No savings other than an emergency fund of approximately $14k, good for about 3 months of living expenses.
- We have not started seriously investing in a retirement plan, other than in our teacher pension plan.

Option 1: Click a few buttons, and be student debt free. Feel good about it, and have about ~17k a year we can save toward retirement, down payment, eventual daycare costs, etc. (a whole 'nother debate!).

Option 2: Invest the 60k, hope for better than a 4% return, and have about ~13k per year toward savings after paying the minimum monthly payments on the loan.

Probably forgot a few things, but that's the information I have off the top of my head. Any thoughts would be greatly appreciated! Thanks!

 

[Lucantes]

If it was me, just because my wife and I don't like debt, I would do the following:
Take maybe 5% ($3K) and allow yourselves to use it doing something you want, or buying something you want (basically treat yourselves so that you won't feel like you missed the gift that you received).
Take another $14K and double up your emergency fund, now you have a 6 month cushion.
If you are allowed a ROTH/IRA, max it for 2016 (think that is another $5500?).
Take the remaining $37.5K and decrease your debt by a big chunk.
Proceed on with your normal life and make sure you always pay yourself first (invest in your future retirement).

 

[RobbieB]

If you want a house and feel very secure about not having to move anytime soon (say 10 years) then I would bank it for the down payment. It's 20% now and that seems about right.

I like my own house and the freedom to do what I want with it. Also a good investment but not if moving soon is likely.

 

[Markola]

First, congrats on not choosing Option 3 - the Choice of Most Americans - Buy a new Beemer.

The fact that you know about this board and have posed a thoughtful question probably means you can save and will someday win the money game. You asked for advice, so this stranger you've never met is all over the first choice. Use the windfall to get rid of the debt concrete shoes so that you can swim strong and focus on saving. You were surviving prior to the inheritance so it is found money you didn't know you needed. Money in accounts has a way of getting frittered away but no debt is no debt, and you can't change your mind and generate new "needs" for it like you can when there's big cash sitting around, singing its siren song. I'd see it as a gift from heaven and put the debt behind me permanently. Read Mr. Money Mustache's rant about debt and how getting rid of it is like wiping stinging bees off your face, ie the top priority if you want to be wealthy.

However, I wasn't clear whether you personally have the debt and also personally received the inheritance. If so, it's an easier call. If not, there's more risk of resentment later, so talk it out.

Next, think long and hard before you buy a house - really study it critically - because houses one lives in are simply not investments after you rigorously subtract ALL of the costs. Houses are the least-worst way to spend money for most people because over time one usually builds up some equity. But, again, you are clearly not most people. A saver gets so much more tax and employer-subsidized growth tailwind -and critically, early in your careers -from aiming to max your 403b plans, that I'd aim for that as the next goal after paying the loan. It is practically free money. Third, after you do that, save for a house if you want to and as you enjoy some pay raises, or get through the expensive daycare years and then buy. Delayed gratification is what it is all about.

Also, as teachers, if you are not aware of the blogger known as the Millionaire Educator, you might Google him. He and his family have documented their amazing path to FIRE on teachers' careers and they will FIRE this year. Good luck!

 

[samclem]

In your shoes, I'd want to retain the flexibility/cushion that the new money provides rather than use it all to pay down a low-interest student loan.

First, I'd be sure I used the money to max out any matching opportunities for my/DWs retirement accounts through our employers. That's free money.

Next, I'd max out Roth IRA contributions for both of us. Contributions (not earnings) to a Roth can be withdrawn at any time without tax or penalty, so I'd consider my contributions as adding to my "emergency fund" in case of job loss, etc.

I'd put about 20K into a short-term CD. That's a healthier emergency fund, and it's available to use as part of a down payment on a house.

I'd put the rest into a diversified portfolio of mutual funds. If you guys have a child, there will be costs and a reduction in income. These investments, plus the CDs, will be much more useful in that case (to include making the payments on the student loans and all other expenses) than a piece of paper indicating the student loans were paid off.

 

[PapaBear67]

I'd want to consider the cash flow element too. How much are you paying monthly right now on the student loan? If it is a significant amount, I would look to pay that down ASAP, and then consider what you are doing with the free cash you now have available. What you were paying on student loans could now be systemically put to work building a down payment, increasing emergency funds, funding an IRA, etc.

If the payment term on the student load is still a significant period of time, even at 4% paying it off early will save substantial amounts of interest payments. Saving that money could be significant over time too.

You have an opportunity to eliminate a very large debt without affecting what was you current position or plan before it became available.

 

[Danmar]

First, congrats on not choosing Option 3 - the Choice of Most Americans - Buy a new Beemer.

Or much more likely a fully loaded F150 or Silverado as discussed in a previous auto thread. Agree with your advice to pay the debt down though.

 

[Elbata]

I'm with Markola on this.

What I most agree with is that you're on this board. To me, that alone shows you have a good head for finance.

Pay the debt, be done with it.

(Caveat emptor--Never trust an axiom )

 

[davismills]

Option 1.

 

[Gill]

Who inherited the money and whose student loan is it?
Bruce

 

[jim584672]

Pay off debt.

 

[tmm99]

Option 1. Definitely.

 

[PanHandler]

Pay off the loans.

 

[Aerides]

Pay the loans in full, but then use the money you would have been using to pay loans as:
- Month 1: celebrate, have some nice dinners out, allow each other a nice treat that you wouldn't normally spring for.
- Months 2-8: Beef up your emergency fund to 6 months plus
- Months 9-12: Roth

Then in year two+ Roth > House/Near Term/Kid savings

 

[Jimbo Slice]

Thank you guys for the input. Keep it coming, great stuff. A lot for me to still consider and process.

For those who asked, both the debt and inheritance are mine.

Also, we used the first bit of the inheritance to pay off both of our vehicles. Clearing the student loan as well would free up ~$850 per month of extra cash flow. The student loan payment is $350 per month. So the cars alone were $500 a month.

Paying the loan would result in an extra $850 toward financial priorities. Investing the $60k balance would allow an extra $500 toward financial priorities, in addition to whatever the investments return over time.

Keep in mind we have $14k in a savings account currently. May ladder that into CD's based on what I've read here.

 

[ivinsfan]

Uh,now that you have told the whole story about the 2 cars loans your numbers make some sense. The loan actually costs you 350 not 850.

At 28 on 80k gross with 2 car payments and that big loan you were not doing yourself any favors. Most lifetime teachers go on to get masters degrees to raise their income, which means even more debt. How are housing prices and rental prices in your area? First I'd decide if you do want a house, because 20% down, no PMI, and a lower interest rate is a large monthly savings. Perhaps a house payment would equal your rent and a car payment or 2. I'd think hard about your housing situation before spending that money on anything.

 

[DrRoy]

If it was me, just because my wife and I don't like debt, I would do the following:
Take maybe 5% ($3K) and allow yourselves to use it doing something you want, or buying something you want (basically treat yourselves so that you won't feel like you missed the gift that you received).
Take another $14K and double up your emergency fund, now you have a 6 month cushion.
If you are allowed a ROTH/IRA, max it for 2016 (think that is another $5500?).
Take the remaining $37.5K and decrease your debt by a big chunk.
Proceed on with your normal life and make sure you always pay yourself first (invest in your future retirement).

I like the idea of debt reduction, but also doing several things with small amounts as suggested above. You could tinker with the amounts, like less into the emergency fund and more into the loan. When I got a bonus this year we bought concert tickets and saved the rest.

 

[Katiek]

I'd probably save some to fund a Roth IRA this year and next which could also help serve as an extra emergency fund. Then I'd use a chunk to decrease the student debt.

 

[retire2020]

Pay off student loan. Invest that $850/month you save now. DCA will reduce risk of investing all that 60K at once!


Sent from my iPhone using Early Retirement Forum

 

[Options]

Pay off student loan. Invest that $850/month you save now. DCA will reduce risk of investing all that 60K at once!


Sent from my iPhone using Early Retirement Forum

+1
Everything I've ever read recommends paying off debt before investing. The very best venture capitalists are extremely careful in their use of debt and leverage.

 

[Gumby]

Imagine this scenario: It is September 2007 and you are exactly where you are today. You invest $60,000 in the stock market (say SPY), which is higher than it has ever been. The market starts to slide. Less than six months later, Bear Stearns fails and the market really starts to crater. Panic selling sets in that fall of 2008. By March 2009, your investment is down to $25,900. All around you, people are losing their jobs, their investments and their homes. The taxpayers demand relief and your local school budget takes a substantial hit. As some of the most junior teachers, you and spouse are RIF'd. You now have no cash flow, a three month emergency fund and whatever you can salvage of your SPY investment. AND you still owe almost $60k on your student loan -- which cannot be discharged in bankruptcy. Now what do you do?

 

[samclem]

Imagine this scenario: . . . As some of the most junior teachers, you and spouse are RIF'd. You now have no cash flow, a three month emergency fund and whatever you can salvage of your SPY investment. AND you still owe almost $60k on your student loan -- which cannot be discharged in bankruptcy. Now what do you do?

Consideration of a scenario like that would convince me >not< to use the majority of the money to pay off the low-interest student loan. The cash-flow calamity can come from many directions, some are more likely than another widespread financial downturn--just a regular job loss, birth of child (more expenses, less pay, and sometimes some unanticipated medical bills), an illness, etc. Having liquidity to keep the bills paid could be a lot better than losing liquidity by paying off that student loan. It could be darn difficult and expensive during a personal or widespread financial setback to borrow more money--so I'd want to avoid the risk of needing to do that. If they have the money in CDs, low-risk investments, etc they can always pay off the loan, but that's a one-way door. In their present situation, I'd choose to retain maximum flexibility. In a few years when they have more in savings and more seniority at work, then I might make a different choice.

 

[Gumby]

Good points all, SamClem. As in everything, the future is a mystery. But I think it helps to contemplate the downside as well as the upside of any investment.

 

[retire2020]

Imagine this scenario: The market starts to slide. Less than six months later, Bear Stearns fails and the market really starts to crater. Panic selling sets in that fall of 2008.

I was an employee of Bear Stearns....That Friday before the fall on Sunday - all BIG shots in firm told us not to worry and instigated us to buy Bear Stocks as it was trading at $30(was around $100 few months prior to this). Me and bunch of other idiots followed and I bought 1000 shares at $30 two minutes before the close. That Sunday it was sold to JPM for two bucks....A loss of 28K(93.3%) in two minutes--yikes. And following Monday, I had lost my job also....still makes me sick when I think about that.

 

[mystang52]

Everyone is different, but I find being debt-free so liberating, and it makes sleeping at night easier. As teachers, you can have reasonable expectation of job security and consistent salary increases, but nothing huge. At least, that's been the experience of my DW.
Wouldn't life be easier without that debt load, freeing up the cash flow?