Inheriting wind can eliminate many problems. But, as one caller to The Ramsey Show discovered, it can also create pressure to get every decision right.
Kayla from Texas will receive a $200,000 inheritance from her grandfather’s trust, with taxes paid in advance. She and her husband plan to use $30,000 to pay off their car loan and put another $30,000 in an emergency fund. It still has $140,000 and they want to account for it (1).
With $320,000 left on their $340,000 mortgage and the possibility of moving in three years, they wanted to know: Should they pay off the house? Invest money? Or do something else entirely?
Personal finance experts and hosts, George Camille and Jed Warshaw, offered advice that was the opposite of what most listeners might expect.
The couple is financially stable; They make about $150,000 a year and consistently contribute to their retirement savings every month, taking home about $8,600-$8,700 between their paychecks after all deductions.
Their first impulse is to set aside six months of expenses in a savings account (think: emergency fund to cover anything unexpected, urgent, and necessary) and eliminate their non-home loan.
The caller did not disclose the interest rate on the couple’s car payments. However, the cost of these loans is usually high and effectively repaying them is a guaranteed return equal to the interest rate of the loan (2).
The show’s host agreed to the plan, which aligns with Dave Ramsey’s seven “baby steps” priorities, putting Kimmel and her husband in steps four, five and six.
After that, broad financial planning guidelines encourage recipients of sudden assets to maintain their financial stability before moving into long-term investments (3) (4).
That leaves the big question of what to do with the remaining $140,000 so they can make the most of it.
The couple considered paying off the bulk of their mortgage.
However, the caller adds, “We don’t know if we want to stay in this house for long.”
They want to approach the caller’s father in another situation. Besides, Kayla says, “the neighborhood is going in a direction that they’re not really happy about.” So the move may happen within a year, if a suitable job opportunity arises.
The couple also floated the idea of investing the money in a mutual fund, but the Ramsey Show host had other advice.
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Under Ramsey’s traditional “baby steps” framework, aggressively paying off the mortgage would be a natural next step.
Mortgage rates today remain above historic lows in 2020 and 2021, according to Freddie Mac’s weekly survey, and larger principal payments can save significant profits over time (5).
But this situation is not textbook, Kamil and Warshaw argue that the decision largely depends on their time horizon.
If the couple expects to move within a year, Camille recommends keeping the money accessible. “I’m going to kind of keep it open and put it in a high-yield savings account and just park it at, you know, 3.5% right now. ‘We’re not trying to make more money than that, we’re just taking some time to make the next decision.’
“If you put all of that into a house and only for some reason the house took too long to sell or for some reason the value went down, it might make you feel kind of different,” Warshaw agrees. “It’s hard to move and it’s great to have cash on hand.”
Keeping the liquidity would allow the couple to use the $140,000 as a down payment on their next home, potentially without having to sell their current home first, potentially at less than ideal prices.
However, if the move is more than three years away, Camille argued that putting the money toward the current mortgage might make sense. The caller agreed and said they were on an unofficial timeline of a year – if they didn’t move in the next 12 months, they would have a large foreclosure on their mortgage.
“Yes, I like this plan!” Kamil agreed: “The money is not missing,” he said. “It’s just a forced austerity plan.”
In both cases, the game is to eventually use the money to pay off the mortgage. It’s just a question of which one. Kamil and Warshaw agree that should be a priority for now, beyond their retirement plans, over investing in the stock market.
“You can have some fun with it. There’s nothing wrong (with), ‘Hey, you’re in debt with an emergency fund.’ Maybe use it for some fun,” Kamal said.
The host suggested spending about $5,000 on some windfall — perhaps on a souvenir trip — and also saving about $100 a month in a separate “sinking fund” for home and car maintenance.
Winds often create emergencies. A large amount sitting in a bank account can feel like a problem that needs to be solved immediately.
But there’s more to that money, including opportunity cost.
Consumed wisely, it can enhance a person’s quality of life. Badly spent, it can lead to years of regret over missed opportunities.
As this caller learned, blindly following general advice can be dangerous.
Traditional smart moves, like locking cash into home equity and exposing it to market swings, aren’t always the best immediate play for everyone.
In the case of this pair, flexibility and maintaining liquidity take precedence over high potential returns. And he took personal advice to realize it.
When inheriting, it’s also an important reminder to see how much money you actually get to keep.
While there is no federal inheritance tax in the United States, residents of Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania may have one depending on the relationship with the deceased and the size of the estate (5).
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Ramsey’s Show Highlights (1); Federal Reserve Bank of St. Louis (2); SFP Standards Board (3); Tax Foundation (4); Freddie Mac (5)
This article provides information only and should not be used as advice. It is provided without warranty of any kind.
