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Best thing to do with an inheritance when young and clueless?

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Hello,.

I'm about to be a senior in college and will soon be getting a large inheritance between $30-50k. I'm not sure what to do with it. I'll owe about $20k in student federal loans when I graduate. Half the loans are at 3.76% and the other 4.29%. Is the best decision to pay all of these off when I get the inheritance? Or should I be investing the money? If investing is the option, then how would I go about doing that? I've been working since high school and I have very little savings personally because everything I've earned I've spent on tuition and bills. I don't have anyone to ask for advice about these things so it would be really helpful to give me any input you have.

Thanks!

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I think most people here would ask for additional info about your situation before a full decision.

What's your major? Plans for post-college career? Job lined up?

If you're going into a good field and plan to work pretty shortly after graduation, I'd be looking for a payoff on the 4.29% loans and probably put the rest in an index fund - I'd rather invest than payoff the 3.76% if you'll have a stable/good-paying job and be able to support yourself.

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Try not to spend it. When I worked at a bank, I watched a bunch of 'young' people with 'special money' waste it away.

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It might be a good idea to pay off those loans so you are not tempted or lured into wasting most of it. At your age I would have wasted every dang cent. Good luck!

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It depends somewhat on what you think you can handle. Some suggestions: 1) determine that you will absolutely not spend 50% and put it into savings or investment (like dividend growth stocks). 2) Double your payments on loans or pay off in total the higher interest one. 3) If you receive $50K, think about paying off your loans in total.

The first thing I'd do is put it in an Alliant CU savings account that pays 1%, then dole some out from there.

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Your loans are pretty cheap - if those are fixed rates, I think paying them off as slowly as allowed is the smartest option for them.

To invest the money, open an account with Vanguard, Schwab, Fidelity or another big consumer investment company if you are already familiar with any. Put all of the money into a very broad stock fund with an expense ratio of .05% or less. Set dividends to reinvest and leave it alone.

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abbadabbadingdong said:   Hello,.

I'm about to be a senior in college and will soon be getting a large inheritance between $30-50k. I'm not sure what to do with it. I'll owe about $20k in student federal loans when I graduate. Half the loans are at 3.76% and the other 4.29%. Is the best decision to pay all of these off when I get the inheritance? Or should I be investing the money? If investing is the option, then how would I go about doing that? I've been working since high school and I have very little savings personally because everything I've earned I've spent on tuition and bills. I don't have anyone to ask for advice about these things so it would be really helpful to give me any input you have.

Thanks!

  If you are still working and have earned income, do contribute to a Roth IRA. You can contribute the lesser of your earned income or 5.5k per year. So you could put up to 11k between 2017-2018.

Use a small portion, say ~1k to splurge on something (and think about the person who provided the inheritance) so you dont fully deprive yourself of some immediate gratification.

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Working since high school? I'd take @fwuser12's advice and spend some, but my suggestion would be to continue your education with a couple of months traveling a bit rough in some place like Mexico or the EU before going back to work.

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Unless you need it for your education, I would invest it in stock or bond index funds and pretend you never got it. You'll thank yourself decades later.

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TravelerMSY said:   Unless you need it for your education, I would invest it in stock or bond index funds and pretend you never got it. You'll thank yourself decades later.
  Exactly - each you you want to remember it just enough to put as much as possible into a Roth IRA.  Then forget about it until the next year.

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abbadabbadingdong said:   I'm about to be a senior in college and will soon be getting a large inheritance between $30-50k. I'm not sure what to do with it. I'll owe about $20k in student federal loans when I graduate. Half the loans are at 3.76% and the other 4.29%. 
  
$30-50K isn’t a whole lot of money in the scheme of things. One years worth of ave. American income. At this stage in life when you aren’t established yet, pay off your loans and put the rest in savings. Millions of grads are saddled with student loan debt and the chance to be free of that is great. Investments are for those with money they wouldn’t miss if they lost it or a substantial part of it if the market turns. Paying off the loans would be equivalent to earning 4% on your money and you won’t come close to that with any guarantied account.

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SlimTim said:   Your loans are pretty cheap - if those are fixed rates, I think paying them off as slowly as allowed is the smartest option for them.

To invest the money, open an account with Vanguard, Schwab, Fidelity or another big consumer investment company if you are already familiar with any. Put all of the money into a very broad stock fund with an expense ratio of .05% or less. Set dividends to reinvest and leave it alone.

  Or set them aside (or, withdraw from vanguard/etc yearly) to enable maxing tax-sheltered retirement contributions for a few years.  If you were already going to max them then... guess second slimtim's suggestion as a taxable account.

$30-50k is not that much, it's just ~2years of maxed contributions to 401k.  <2 years of maxing 401k+IRA

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One other thing to factor in:

Student Loan Interest, up to $2,500, is a BEFORE AGI deduction (i.e. you don't have to itemize so you can Use it as soon as you start paying taxes). When you start paying your loans and start earning money this could save you up to 25% once you get into $40k income range.

If you invest the inheritance you wont be taxed on gains until you withdraw it and, assuming > 1yr, will be tax as LTCG (i.e. max 15%)

Disclaimer: This is an interesting but veeeery marginal tax benefit I'm pointing out which would require a fair amount of long-term attention and monitoring even if you plan to 'not touching anything for along time'. If plugging in amounts into a spreadsheet and giddily calculating a small net benefit every month isn't appealing to you, I would pay off student loans first opportunity.

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Grab some physical precious metals - then forget you have them

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SlimTim said:   Your loans are pretty cheap - if those are fixed rates, I think paying them off as slowly as allowed is the smartest option for them.

To invest the money, open an account with Vanguard, Schwab, Fidelity or another big consumer investment company if you are already familiar with any. Put all of the money into a very broad stock fund with an expense ratio of .05% or less. Set dividends to reinvest and leave it alone.
+1
But to be more specific, start reading about Lazy Portfolios and implement one of the easier ones, like three-fund or core-four.

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Old school thinking. When your financial world gets such a shock, do nothing for up to a year. This is to allow your mentality to catch up to your situation. There is a Dave Ramsey who preaches being totally debt free.

The other school of thought believes using other people's money to the maximum advantage so long as you have an escape plan when everything goes against you.

Aside from that, the question of your first job is valid. IF you are qualified for a job in high demand, some companies will pay off your school loans or put you on a performance plan that pays your school loans when you meet certain goals.

What have you longed to do, but school got in the way? Taking time for yourself can be important, but be aware many grads are going straight to work taking up jobs you may want.

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It sounds simple but it's not, don't spend it

1st you should have a budget for yourself already in place, 2nd place some if it in your local bank if you need access to it, and the rest in a bank about 2 or more hours away you don't have access to unless you drive !!  You will find tons of reason to access the money, but don't think of it as your starter nest egg or  very hard core 911 fund.

Most of my friends that got money somehow blew through it, one thing went to the next, new laptop, more cloth, trips, nights out, new girlfriend, and then another it goes on, start a spread sheet and keep your budget in place... It's all about self control and being smart, a new iphone every year or 2 years in not smart, it's making other people rich !!  Save for a house

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1) Max out ROTH IRA for 2017.  See #3.
2) Vanguard Total Bond Market Index Admiral - $20,000, use to make loan payments on schedule IF loan interest is deductible AND if net rate after deduction is 2% or less. If loan interest is not deductible, pay off loans in full.  Builds credit rating, but only matters if net rate is 2% or less.  If loan repayment period is 10 years or more, make this $10,000 and put the other $10,000 in #3.
3) Vanguard Total Stock Market Index Admiral - $20,000
4) Spend up to $2,000 after graduation.
5) Max out 2018 IRA.

With any investment, reinvest dividends and interest.

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#1 - Don't tell anybody.  You don't need your college buddies thinking you are in high cotton and hitting you up for cash.

You are entering your senior year of college?  Put the money in the bank for a year and see where you are.  If you land a job right away, then you can see how this savings fits in to your overall financial picture at that point.  Then you can make some better decisions about retirement accounts, paying off debt, minimizing taxes, etc.  

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EradicateSpam said:   1) Max out ROTH IRA for 2017.  See #3.
2) Vanguard Total Bond Market Index Admiral - $20,000, use to make loan payments on schedule IF loan interest is deductible AND if net rate after deduction is 2% or less. If loan interest is not deductible, pay off loans in full.  Builds credit rating, but only matters if net rate is 2% or less.  If loan repayment period is 10 years or more, make this $10,000 and put the other $10,000 in #3.
3) Vanguard Total Stock Market Index Admiral - $20,000
4) Spend up to $2,000 after graduation.
5) Max out 2018 IRA.

With any investment, reinvest dividends and interest.

  

Do this.  Use this every year to max out your ROTH IRA if your income is relatively low.  You can always withdraw your Roth contributions without taxes/penalties (earnings would have taxes and possibly penalties).  Live below your means as if the money didn't exist. This could be your house down-payment in a few years.  You're probably already ahead of the game just asking these questions.  This amount of money would be very easy to blow through in a couple of years if you aren't careful, but could dramatically change your financial picture for the better if you are careful.

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You could also buy a Mazda Miata and have some fun with the money.

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johnm4 said:   
EradicateSpam said:   1) Max out ROTH IRA for 2017.  See #3.
2) Vanguard Total Bond Market Index Admiral - $20,000, use to make loan payments on schedule IF loan interest is deductible AND if net rate after deduction is 2% or less. If loan interest is not deductible, pay off loans in full.  Builds credit rating, but only matters if net rate is 2% or less.  If loan repayment period is 10 years or more, make this $10,000 and put the other $10,000 in #3.
3) Vanguard Total Stock Market Index Admiral - $20,000
4) Spend up to $2,000 after graduation.
5) Max out 2018 IRA.

With any investment, reinvest dividends and interest.

  

Do this.  Use this every year to max out your ROTH IRA if your income is relatively low.  You can always withdraw your Roth contributions without taxes/penalties (earnings would have taxes and possibly penalties).  Live below your means as if the money didn't exist. This could be your house down-payment in a few years.  You're probably already ahead of the game just asking these questions.  This amount of money would be very easy to blow through in a couple of years if you aren't careful, but could dramatically change your financial picture for the better if you are careful.

  
Do this via Wealthfront and forget it.

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There is this guy: http://tim.blog/2017/02/13/mr-money-mustache/

Not for everyone, but if you start young enough, before you saddle yourself with responsibilities, debt, and being accustomed to an expensive lifestyle, you could definitely make this work for you.

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misterphillip said:   You could also buy a Mazda Miata and have some fun with the money.
  You mis-spelled "Crown Vic"!

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forbin4040 said:   Try not to spend it. When I worked at a bank, I watched a bunch of 'young' people with 'special money' waste it away.
  
That would be H&B now that a crown vic has been mentioned. 

Pics? 

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Since you don't know, keep it in a 100% safe place where you can't lose money but can take it out any time, like an FDIC-insured bank account   The whopping 1% annual interest they pay now (at best -- some Internet banks) isn't much, but it's much better than putting your money into something risky that you don't understand and that could be expensive (sales person's 5% commission).   

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As someone fresh out of college, in my mind you just got a free 6-12 month emergency fund. I would lock it in a bank account and not touch it since you're in a very vulnerable time (just out of school, trying to find a job - lack of stability, etc...)

After getting a job and starting payments on your loans, perhaps pay a little extra month by month - because while most kids would normally need to save some extra for an emergency fund, yours will already be established and stable.


Just my 2 cents. I wouldn't be in a major rush to put a large lump sum payment on those loans - especially with those stable interest rates.

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If you still have a year of college expenses to spend, and you're in a state with tax deductions for 529 plan contributions, that may be a good idea to contribute to your state's 529 plan to the level of the tax deduction. Only contribute as much as you're sure you'll use for college expenses though. Caveat is obviously only if you're having enough income to pay state income tax. Easy quick returns of your marginal state income tax rate in some cases.

Although you can get better returns by investing it, I'd personally pay off my student loans (roughly 4% risk-free returns isn't too bad currently) since no matter what that debt is not gonna get discharged. So $20k there.

I'd contribute $11k (or whatever you're allowed to) to a traditional IRA or Roth IRA for years 2017 and 2018 so that at least your investing growth tax free.

Then the rest, I'd probably blow some of it on personal hobbies. You're only in your early 20s once.

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Put all your money on Bitcoin.

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Since no one has said it yet... Put it all in an Ally online savings and also open an Ally checking account. Then start doing credit card sign up bonuses and bank sign up bonuses. Use the bonus money/points to travel. If you get tired of that and/or the bonuses dry up, follow some of the other advice in this thread.

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meade18 said:   Since no one has said it yet... Put it all in an Ally online savings and also open an Ally checking account. Then start doing credit card sign up bonuses and bank sign up bonuses. Use the bonus money/points to travel. If you get tired of that and/or the bonuses dry up, follow some of the other advice in this thread.
  
Yes, because based on OPs post, we can safely infer that he knows how to properly manage credit card debt to the point of not overspending, properly allocating expenses to accrue bonus', and has decent enough credit  All 3 are VERY safe assumptions, and nothing could possibly go wrong with your advice.

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dcwilbur said:   #1 - Don't tell anybody.  You don't need your college buddies thinking you are in high cotton and hitting you up for cash.

You are entering your senior year of college?  Put the money in the bank for a year and see where you are.  If you land a job right away, then you can see how this savings fits in to your overall financial picture at that point.  Then you can make some better decisions about retirement accounts, paying off debt, minimizing taxes, etc.  

 I second both parts of this approach. If your loans are subsidized, you have some flexibility when it comes to repayment and hardships.  For instance, if you pay off the loans right away, you are done with them, but you don't leave yourself much of an emergency fund.  If you don't pay them off, and you face a job loss or other qualifying hardship, you can temporarily stop payment on your loans (without balance growing thanks to federal subsidies) and would still have your cash cushion as an emergency fund.  It's tricky when you're first starting out--lots of ups & downs was my experience.  Having that kind of safety net in the bank affords you more opportunities & not always stuck making the safe play with your career.  Stick the money in something safe for a while & see where you are when you get done with school.  Enjoy your senior year, don't spend it all on H&B, maybe some, but not all. 

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I received a small inheritance while in college (Junior year). I used it to:

1) Quit a night job I had that was interfering with my studies and overall mental health
2) Spent 3 months using a Eurorail pass and cheap hostels to see eastern europe and Turkey among other locations immediately after I graduated. I put off my future employer start date by the three months


I figure the above cost me around $25,000 in today's dollars (plus opportunity cost). Looking back, I feel I made the right choice. I didn't have student loans like you did and I was heading into a lucrative field. There's some things you can only do (well) in college or shortly afterwards and then life intervenes.

My brother, in similar circumstances, chose to buy an SUV and camp and kayak in the mountains for 3 months. He is also glad he did it.

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justignoredem said:   
meade18 said:   Since no one has said it yet... Put it all in an Ally online savings and also open an Ally checking account. Then start doing credit card sign up bonuses and bank sign up bonuses. Use the bonus money/points to travel. If you get tired of that and/or the bonuses dry up, follow some of the other advice in this thread.
  
Yes, because based on OPs post, we can safely infer that he knows how to properly manage credit card debt to the point of not overspending, properly allocating expenses to accrue bonus', and has decent enough credit  All 3 are VERY safe assumptions, and nothing could possibly go wrong with your advice.

  
The dude is 21, about to get a $30k+ inheritance, and he found a finance forum to ask advice rather than blowing it on H&B. If this is all true, he's a perfect candidate to start the credit card/bank bonus game.

I got my first credit card my junior year in college, never carried a balance, and started signing up for bonuses a few years later when they were about 1/4 as valuable as they are now. And that was with very few online forums, blogs, and databases explaining the best strategy. If I had the current FWF, DoC, and Points Guy type sites at my disposal, along with the bonus environment we are in now back at his age, I would have done way better. Why do you automatically assume it's bad advice? Maybe he can handle it, maybe he can't. I don't know. But, that should be up to him and he's a great position to try. I just got a co-worker into the bank bonus game and he's wishing he had more cash on hand to hit some of the better $15k bonuses. This guy has a head start - he could take advantage of that if he feels capable.

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sfchris said:   I received a small inheritance while in college (Junior year). I used it to:

1) Quit a night job I had that was interfering with my studies and overall mental health
2) Spent 3 months using a Eurorail pass and cheap hostels to see eastern europe and Turkey among other locations immediately after I graduated. I put off my future employer start date by the three months


I figure the above cost me around $25,000 in today's dollars (plus opportunity cost). Looking back, I feel I made the right choice. I didn't have student loans like you did and I was heading into a lucrative field. There's some things you can only do (well) in college or shortly afterwards and then life intervenes.

My brother, in similar circumstances, chose to buy an SUV and camp and kayak in the mountains for 3 months. He is also glad he did it.

  
I don't know how much you are allocating to not working and how much to traveling, but I second the travel idea. However, you don't need to spend anywhere near $25,000 to have a fantastic experience that will last you a lifetime in memories. I didn't have the desire to do Europe at that age, so I did a 3 week cross country road trip with a buddy the summer I turned 21. Only spent a couple thou. Same thing - fantastic memories and no regrets.

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he said he quit his night job and travelled, and that cost 25k, not that the travel itself cost 25k.

He lost income from the night job.

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paying off loan vs investing: keep in mind that the "return" on paying off your loans is a risk-free rate of return while investing will involve some risk (especially above 4%).. In addition if you ever make more than $85k per year the deductibility of the interest on the student loan will will diminish.

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Hey everyone! Thank you so much for all of the responses. To answer your questions, I am not going into a STEM field. I am not entirely sure what specific job I'll get upon graduation, but I am expecting a starting salary of about $40k/year with lots of room for growth once I get some experience. From what you've all been saying, it seems like paying the higher interest loans (if not all) is the best option. I don't have any idea how to contribute to a Roth IRA, so advice about that would be greatly appreciated. As for credit cards and points, I do have a credit card for the purpose of gaining credit (I basically use it as a debit card because those interest rates are horrifying). Again though, I have no knowledge of points or how they work or if I am eligible for those type of cards since I've only had a years worth of credit history.

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Opening a ROTH is quick and painless. I think it can all be done online with Fidelity.com (or any other brokerage service). I agree with much of the above. Max out a ROTH (investing in low fee index funds-look at IVV if using Fidelity). That'll use up $11000 if you load up two years. I'm sure this has been said before, but keep about six months worth of salary as an emergency fund that you don't touch. Pretend it isn't there in your day to day life. You have a great opportunity to start investing early. Compound interest can be a great thing! (And use $1k or so to have some fun or use it to get settled with your new job when it comes around.

Skipping 23 Messages...
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The "advantages" of having student loans, as opposed to other debts, start to decline rapidly if you have some degree of success in your career:

1) You can only take the tax deduction to a maximum (up to $2500 now, I believe),
2) If you marry, you only get to claim the tax deduction for interest once between the two of you,
3) The interest rates are out of step with current rates and the disadvantages (not being able to discharge in bankruptcy), and
4) You lose the ability take the write off at all at certain levels of income.

The nagging angst only is bad if you have a significant amount of debt. I was able to pay off a good some of my student loans by going back to school. My employer paid my tuition for a masters degree program. While in school, my interest was subsidized on loans that were previously subsidized because I was back in school, moving them to 0%. Instead of chilling, I kept paying my loans but shifted all of my funds to unsubsidized loans and paid what I had been paying. I was able to pay off 2 of the 4 unsubsidized loans. I am thinking about doing this again to get them paid down further. I need continuing education credits for a certification that I have and university courses are easily documented and attained compared to other forms... and my employer will pay for them... and I can work towards another graduate degree that would be useful for me in the future (an employer that I have my eye on has a preference for dual masters degree holders, and MBA plus a job-specific masters degree).

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