How to invest an inheritance

jockewingJune 22, 2010

I am 34 years old and single. My only debt is about $75,000 at 6.1% with 20 years left on a fixed 30 year mortgage. The house is now worth about $130,000, so I have a nice bit of equity. My income is about $3,000 a month after tax.

My grandmother passed a few months ago and I inherited the following:

$75,000 in cash

$220,000 in an Edward Jones bond/mutual fund portfolio

A well-kept house that appraised at $175,000 (no mortgage)

A 2003 Buick Century (barely any miles, like brand new)

All the household furniture and effects

There are no estate taxes due and I should receive the stepped-up basis as of the date of death on the investments and the house.

I know this is an amazing gift and I want to make the right decisions on what to do with it. Currently, I have about $12,000 in savings and $10,000 in a 401K. Here are some things I am pondering:

-I probably will stay in my home so I either need to sell the inherited home or rent it out.

-I would love to refinance my house or even pay it off. Unfortunately, I have lousy credit (a little over 600 score). I don't know if I could get the good rates even putting down a significant amount.

-The investment account is currently very bond-heavy and probably needs to be re-calibrated to match my age and investment goals

-I need to know how to improve my credit score. Even though I could buy a car in cash, I thought maybe I could finance a couple of thousand just to establish a new account that is paid on time. I don't have any credit cards, so maybe I should get one and just use it to buy gas or something and be sure to pay it off in full every month.

-Thinking about setting aside 15K or 20K in some type of emergency fund that is not very convenient to get the money out of.

Can all you investing experts help me?

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I'm sorry to hear about your grandmothers passing.

I think the best advice I could give is to make no major financial decisions for several months to a year. Park all of the money someplace safe. A tiny bit of lost interest is MUCH better than making any rash decisions. Besides, if you are responsible for all of her effects, that will give you plenty to do for a bit.

As for the car, do you currently have one? If not, just drive it. If yes, you can sell one or the other. Don't borrow money just for the heck of it. Cars depreciate in value over time though so either use it or sell it.

As for the credit score, if you invest and spend wisely, that isn't going to be much of a concern for you. You've got a paid for vehicle, 1 and a half houses and a big bucket of cash. Unless you start living extravagantly, you may never need another loan in your life. Just keep paying your bills on time and your credit score will be fine. If you get 1 or 2 cards that you religiously pay off each month, you'll be fine in the event that you ever do need to borrow money.

Once all the dust clears (in about a year) you can consider your investment options. Even though you are young, I wouldn't be overly risky. If you sell the house, you can take the proceeds and pay off your mortgage and invest the rest. If I were in your shoes, this time next year I would be sitting there with no bills (paid for house and paid for car) and about $400k in a mix of stocks, bonds and cash/cd's. I'd live on the money I was making and just save the rest for now. (You can have a lot of fun for $3,000/month if you don't have any real expenses.) If you just live within your means and let your inheritance grow, you will never have to worry about money in your entire life and you will be in position to bestow as similar blessing on future generations.

    Bookmark   June 22, 2010 at 3:39PM
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The problem is, free advice on the Web from anonymous strangers is worth EXACTLY what you pay for

Congraulations on your windfall. An emergency account for every homeowner/employed worker is certainly a necessity. I would say at first glance to save your $$ for retirement as your after-tax cost of funds on the mortgage is probably not as bad as you think it is.

Rather than weed through the good advice/bad advice that sprinkles the Net, get thee to the Garrett Planning Network at the link below. You need an advisor with full fiduciary responsibility to you, not just the useless 'suitability' standard that uncertified brokers/advisors have. Fiduciary means they MUST put your well-being first, before their self-interest.

It isn't that 'all brokers are bad, all CFPs are good'. That's certainly not true. But your chances for getting someone who will look after your interests first, are greater if you look first at certified advisors. A CFP will look at your financial picture holistically, everything from credit and credit cards to insurance to suitable investment products.

Read the section on the website called "How to Choose An Advisor". It's very important you interview several CFPs to find one that you like, who likes you, with whom you can partner with on a regular basis. This person is going to know a lot about you and the quality of advice is dependent on establishing a good long-term relationship.

Do NOT allow Edward Jones to pressure you to change anything about the portfolio as it stands now. You don't know enough to identify good advice from bad advice at this point. They will be desperate to keep the account(s), they make good money off them and know that heirs can often be persuaded to change into even more profitable accounts (for them, not you).

Once you have identified a CFP and investigated his/her references (and don't neglect this step - yes it takes weeks to do the whole interview/selection process, but this is the only windfall $$$ you'll possibly ever receive, so be patient and take your time), spend the money for one or two in-depth discussions with your new advisor. This money is the basis for your future, and a good CFP will be happy to educate you in an ongoing process of building a relationship of trust that will benefit both of you.

S/he needs to build more than just your risk profile. S/he needs to know your goals, the way you approach money, and how much or how little time you want to give in this working relationship. As your life changes over time the advisor can help you adjust your finances to compensate. They can give you names of potential tax advisors to interview and select, and you should get one before this calendar tax year is over.

If you have no Roth, using the cash to start funding one for 2010 and 2011 is a very wise investment for your future. With this windfall, in light of the economic chaos that others have experienced, I'd strongly suggest you use it to put your retirement accounts in as strong a position as possible. But you need the advice of professionals on the best way to do this for YOU, not generalized advice such as you find on the Net, however well-meaning.

Good luck to you going forward. This is an important opportunity for you and congratulations again. I'm sorry for the loss of your grandmother, but she has given you the chance for a solid financial future, which is a wonderful legacy to receive.

Here is a link that might be useful: Independent CFP's with hourly rates

    Bookmark   June 22, 2010 at 4:05PM
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Condolences. You will honor your grandmother by spending her life savings wisely. Not to be hyper-critical, but at 36, you really should have more put away than you do, so this inheritance was a huge blessing. Don't blow it on cars and big screen TVs.
I can tell you where you are guaranteed 6.1%.
Pay off your house. (Expect to get 20 follow up postings on why this is a bad idea, but keep saying "guaranteed 6.1%.)
As an added bonus, your credit rating will improve. Be sure that you keep your house insurance and taxes up to date - they may be rolled into an escrow account right now.
Check the insurance coverage on your Grandmother's house while you are thinking about it. It needs at least fire insurance.
Your "setting aside 15K or 20K in some type of emergency fund that is not very convenient to get the money out of" - call that covered by the EJ account.
Next, you need to deal with grandma's stuff. This will take more time and effort than you imagine, so I would get started.
Then you can decide whether to rent or sell. Is the market still decent in your location? Have you considered being a landlord? The income stream is nice, but trust me, that money will be earned and if it will distress you to see grandmother's house treated less than respectfully, sell the house.
You have been given a huge gift. It is good to see that you are approaching it thoughtfully, but as mentioned above, the advice you get on the internet is pretty much worth what you spent on it.
I sincerely wish you the best of luck with your decisions. We would love to hear what you decided to do and how it goes for you.

    Bookmark   June 23, 2010 at 3:08PM
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I am going to echo jkom51's comments: If you are not certain about your financial objectives, you should find a financial planner who is a fiduciary -- that is, who is professinally obligated to act in your interests, rather than his/her own. In particular, you definitely want someone who you will pay for the service of advising you, rather than someone who works on commission.

That said, I have two other comments.

(1) When it comes time to invest money, investment fees matter. If you hope for a long-term return of 8% per year, and you are paying 1% per year in fees, that's 1/8 of your earnings! More than that, actually, because you lose the compounding as well. It can make a huge difference over 50 years.

(2) I have attached a link to a website run by a financial management company named Merriman, Inc. I am not a client of them, but this website has a large amount of investment information that I have personally found useful. I am not suggesting that you should become a client of theirs, either. Rather, I believe that the information on their website may help you figure out what to do.

Here is a link that might be useful: Merriman, Inc.

    Bookmark   July 3, 2010 at 11:27AM
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I agree with Gardenspice, pay off the house. You won't ever regret it.

    Bookmark   July 26, 2010 at 10:32PM
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Hi Jockewing,

Along with the others, my condolences for you & your family with your Grandmother's passing.

Some basic rules of thumb for your financial management;
A) "Reserves rule" and you want to initially have, at minimum, safe & liquid funds set aside in an account that cannot lose money to the markets, equal to no less than 6 months of your total costs of living (and preferrably 12 months,)

B) I suggest your "longterm goal" to be to grow your investments to the eventual point where they can throw off enough passive cashflow (without eating into the principal) to cover 100% of your living expenses. This, of course, is the definition of "Financial Freedom."

C) As long as your after-tax interest costs on leverage (loans, mortgage, etc.) remain less than your after-tax average rate of growth on investments, leave the leverage principal alone, and direct every additional discretionary dollar you can into your growth accounts.

D) Yes, you will want to build a "risk/reward pyramid" distribution of your newly acquired assets to fit your stage and profile in life (which considers far more than merely your age... but family status & plans, career/educational status & plans, likely longevity (family history,) personal financial attitude, and other factors.)

All of this, properly done, will likely require the oversight of a good planner... and even then you're going to see significant differences in planning styles, so its a good idea to take your time to interview various planners (and I suggest from various different "financial cultures." Talk with securities-oriented planners, insurance-oriented planners, legal/tax-oriented planners... get a rounded exposure.)

Renting it out is more than simply "renting it out." It is more than simply "taking tax-advantaged cashflow" from your held appreciating asset. Doing so is a decision to enter into the business of being a landlord. It is crucial to understand the gravitas of this, as a decision. (Personally I love the business of being a landlord, for so MANY reasons... but as an Advisor myself, I know too many individuals who never realized it is a business, and have financially suffered because of that.)

NOW... regarding cleaning up your credit. Contrary to the advice above, DO NOT try to go it via any generic "rules of thumb." You *DEFINITELY* want the guidance of someone who understands how to read the reason codes of your current tri-merge credit report, and translate them into priorities and actions to be applied. The people who can generally guide you on this the best are mortgage brokers (even if you are not going to do a refi.)

The "clean your credit" businesses are more often than not a scam.
Retail bank loan officers generally don't know or care about the intricacies of credit improvement.
CFPs, CPAs, Attorneys, etc. are virtually *always* clueless about how the credit bureaus report their specifics, and how to use the reports as an action plan.

Your standard individual Mortgage Broker will be far more likely to dig in & help you work through your plan (even if it takes 2, 3, even 6 months) to get your credit in shape to get a great refinance... and they'll usually do it for no charge (just your honor of doing your refinance with them when (and if) you actually refinance.) Kind of a service "loss leader" for them.

To recap;
RESERVES RULE! Everything else *AFTER* you've locked-out sufficient reserves.
SAFETY FIRST! Get the "guaranteed money" foundation of your risk/reward pyramid in place #1.
SHOP PROFESSIONALS (not investments.) Be sure to shop differing "financial cultures."

Hope that's helpful!
Dave Donhoff
Leverage Planner

    Bookmark   July 27, 2010 at 4:49PM
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The best thing you can do is go to a reputable financial advisor, and an accountant.

A financial advisor will help guide you and help you reach your goals. Be careful in choosing one, though, some of them can be unsavory and are out only to enrich themselves.

You also need to speak to an accountant about any tax implications any of your investments in the future will create. This goes along with the question of maybe putting it in an IRA, 401(k), etc. I am studying to be a CPA and you would be shocked what the tax code contains. Doing something just a little bit different can yield HUGE tax savings (or costs). Keep in mind also that there are tax implications for any dividends received, using a house as a rental property, etc. A CPA should be able to coordinate with your financial advisor on such issues.

    Bookmark   July 27, 2010 at 9:32PM
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