Allocation Advice Needed

joesxm3

Thinks s/he gets paid by the post
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Apr 13, 2007
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Well I am back asking about how to allocate my step brother's inheritance.

Since last time, he seems a bit more motivated to try to be financially responsible and receptive to advice and help from me. So I am less worried about him blowing the money or being scammed by his friends. He bought a house a year ago and most of his excess spending seems related to legitimate house improvements and maybe not enough income to keep with expenses.

He has A VA mortgage for $240,000 at 7.25% and pays about $2000/month on that. He gets disability and small social security maybe $43,000/year or say $3700/month.

He got $109,000 from the estate. The first thing I am doing is having him pay off $6000 of credit card debt and a $6000 credit union loan that he took out last fall. So I guess that leaves us about $97,000 to start with.

I am pushing to have him try to live within budget and pay off the credit card full balance every month. He may run a deficit in the winter due to oil and wood stove pellets. My plan is to take from the mother load to pay for that if necessary.

He also needs to replace the furnace and some other repairs. So maybe we are down to $90,000 after that.

Right now I have him in a government money market earning 4.12% which will probably drop. I would like to get him an equity allocation but I am moving slowly and have $1000 in equity so far and plan to slowly DCA if we continue.

I guess my question has to do with how much of this small portfolio should be reserved as an emergency fund and whether it would make sense to use some of the money to pay down the mortgage in order to lower his monthly expenses if at some point in the future we can refinance at a lower rate.

It seems to me that with such a small portfolio I probably should not put much more than $10,000 into equities. Especially if he might have to burn through $5000 a year to balance the budget.

I also got $108,000 from the estate and I would not be adverse to using some of that to help him if it came to it down the road.

He is single with no children so paying off the house for heirs is not a goal. Reducing the principal would only make sense if done to lower the monthly burn rate.

Well thanks in advance for any advice.
 
What part of the country are you? Heating oil can be a real drag in places like upstate NY where it could be well over $1,000 a month. So definitely get a more efficient furnace.

From the tone of your post, that a simple easy to execute plan is needed, I would lean toward spending on home improvement/maintenance and paying down some of the mortgage. Earning 4.12% while paying 7.25% is a net loss. But the discipline to manage, say a 50/50 portfolio, and only rebalance without trying to chase the market, while keeping enough cash to do home maintenance might be a stretch.

I think paying down the mortgage, but keeping 30-40k for maintenance/repairs is prudent. Then try a savings plan to build financial knowledge/discipline, and start managing a simple 2-3 fund portfolio.

Of course, maybe I'm off target, just more of a gut response here...
 
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