If you inherited a lot of money, would you Pay off your debts? or Save it all?

Question

I have student loans to pay. Almost $1000 a month! The total amount I have to pay back is about $70,000.

When my mother passed away, she left me tons of money. That money I will be getting this year. (enough to pay off all of my student loans with).

I THOUGHT that an obvious person with that kind of money would pay off all his bills. But I am being told differently.

What I am being told is to invest the money, save the money, put it in a life savings account and keep it locked away. I am being told that I have a respectable job now and that I can pay the $70,000 off my self. I was told, Once you grow older, there will be a time in your life where I will need that kind of money. To open a shop or to invest in something or to purchase that house?

I want to start doing this 401 K thing and save money, but I can't with these l student loans on my shoulders. But I understand the sense of saving money.

What would you do if you were in my shoes? Pay off your debts? or Save it all?

Answer 1

Pay off your debt and invest the remaining money.

Answer 2

Do what makes you the most money.

If you can invest it and earn higher returns than the interest on the loans- invest.

If the loan interest is higher, then it is foolish to invest it and basically loose money every day.

In general, however, the smart thing to do is:
1. Pay off all debts
2. Park as much if the remainder as possible in a good investment plan
3. Keep paying what you WOULD have paid on the loans into your investment plan. If your loan would have been $100/month for 12 years, pay that same amount into your account.

Step #3 is both the hard part, and the part that makes the whole thing work.

If you follow this, you will end up with more money in your account than you would have from almost any other plan- mostly because all of the interest on the loans that you are otherwise throwing away ends up in your pocket!

Answer 3

In the long run, you might come out ahead if you invest it. If you can meet the student loan payments, then I would probably leave those alone, especially if the interest rate is 6-7% or less. You man make more than this in investments, (keep in mind that you will have to pay taxes on what you make off you investments, so keep this in mind when calculating the difference though.)
Secondly, having to make the loan payments, forces you to put to "save" that money. That is, you will have the inheritance invested (so the money is already saved) and you will continue to make the loan payments over the years; whereas, if you pay the debt off and are no longer forced to make the payments, it is very doubtful that you will continue to put that amount into investments, so over time, you will end up with less saved.

The final point is that the inheritance will be fairly liquid and you will be able to access it in case you need an emergency fund, or like you said to start a business.

In the end, the best thing is to meet with a financial planner. You should be able to meet with a good one for free and not have to pay anything except the load fees for investments that you put your money into. You can check with your bank to see if they have anyone they can suggest to you, or you can find one on your own. They will be able to give you individual attention and find out exactly the best distribution for your investments and course of action for you to take.

Answer 4

You are correct. The obvious answer is to pay off your debts.

$70,000 is a very big debt and anyone who tells you not to pay it off is not thinking with functioning financial sense.

First, money is a relative thing -- there are folks in the world who ring up $70,000 every month on their American Express card. Their accountant simply writes a check and pays it off. I'm assuming this is not you?

Likewise, there are folks who earn $250,000 a year and have a $25,000 payment scheduled against their 2.5% college debt for the next three years (done with the college loan!) Again, I assume this is not you.

There are also folks who have a $50,000/year job who spend a fortune on an education in hopes of a $250,000/year job who have little savings, no retirement, and no hope to pay off their debt in the next 10 years. This may not be you either...but if it closer to you than the other two examples, the other people advising you are idiots. Don't listen to them.

Here is the bottom line: There are two kinds of good debt: low interest commercial debt used to expand a growning, cash positive business and low interest, fixed rate, 30 year mortgage debt used to purchase a reasonable house. EVERYTHING else is a bad idea. I'm not a nut job, just a realist: Debt takes away flexibility and freedom -- the two things that best define your (future) ability to take advantage of a great opportunity when it lands in your lap.

Take the money. Pay off your debts from the highest interest rate to the lowest. Invest anything that remains.

Answer 5

A Life Account??? Who's telling you that, a life insurance agent that will get an 8% commisssion on the policy sale?

You didn't state how much your mother left but I would think along these lines:

1) Pay down some of the debt to bring the monthly payments to a managable level. Sure you could invest it all now and possibly get a better rate of return but there's something to be said about being able to sleep at night. (I'm speaking from experience here).

2) Even if you can't pay down the debt to a level the payments aren't much of a burden you'll want to stick some saving away to cover emergencies. I use an online savings account, but there's any number of safe liquid places you can invest your reserve. Use this to cover those surprise expenses, the recommonded amount I usually here is about 6 months of your monthly expenses is a good target amount. But you save why would I save at 5% when I'm paying 9% on my debt. Well if your car breaks down, is the student loan place going to give you back your early payments? I don't think so.

3) Think about investing a little to make a better return. Let's face it student loan debt usually isn't that high of an interest rate (mines at 3.75%) and usually there's a little tax break on the interest payments. So if you got it down to where the monthly payments aren't overly burdensome to your monthly cash flow, you got your emergency fund started, I would think you could set aside a little to begin your investment portfolio. Keep it a little more conservative until your investment net worth (all your investment assets - minus your debts) is greater than your debts (in other words your investment assets are at least twice your debts.)

Then each month, pay down debt, invest in your 401K (up to the matching!), save at little, & invest a little... I would recommend spreadsheeting all this to give you a monthly progress report.

Answer 6

Invest. Mutual Funds are a great way to make money and save for your future. By investing you will most likely be making more money than you are being charged in interest on your loans and therefore in the long-run, you will have made a wiser choice,

Answer 7

Do both. Pay off a massive chunk of your student loans. This will lower your monthly payments. With the rest, invest. This will leave you something for the future. Best of both worlds. Spread the wealth.