I received an email recently concerning personal finance. A reader of the blog had received a modest inheritance, all cash, from a deceased relative.
Their present financial situation is the following: they have a steady job with a fairly good income with some savings. Their expenses are modest, having read and followed much of my advice in The Old Money Book. (I’m not bragging; I’m honored.)
They have some cash and some equities in their portfolio, but they are not financially independent and certainly not rich. Furthermore, some credit card debt and student loan debt are still on the books. The total cash inheritance almost equals those two debts combined.
The question this reader had for me was this: ‘Should I use the cash inheritance to pay off (almost) all of my credit card and student loan debt in one go? Or should I hold the cash and continue to pay off my debt month by month?’
I replied, but did not immediately offer an opinion. Instead, I offered to share this inquiry with the Tribe, offer my advice, and also open the forum for other members to contribute their advice…and their reasons for it. They agreed to have their dilemma open for discussion.
So consider your response carefully, and throw in as much experience, logic, and math as you wish.
Here, in brief, is my advice, based on my experience and preferences, and what I’ve learned about human behavior…
I would advise for this reader to hold on to the cash. Put the entire amount into a money market account and earn a modest but steady return. Continue to pay the student loan and the credit card debt each month.
You may pay more interest in the long run, but know this: credit card debt is usually, but not always, the result of bad spending habits. If it takes you 6 months or a year to pay off that credit card debt, it will be expensive…and painful. That expense and that pain will lock into your brain and make you very reluctant to accumulate credit card debt again. Indeed, you may opt to only use a debit card or American Express card, paying your balance in full at the end of each billing cycle. You will be more inclined to live your life going forward on a ‘cash basis’, never spending more than you earn and always earning more than you spend.
As for the student debt, that represents an investment in your future. A lot of people have that kind of debt. Still, I would be reluctant to part with the cash inheritance to pay it off.
I say this for a reason: one of the most difficult things to do in life is to save money. Advertising bombards us daily with temptations and life sabotages us occasionally with unpleasant surprises. Both of these can drain our cash, and in doing so, compromise our financial security.
If you are lucky enough to have inherited cash, hold onto it. Party or splurge with one percent of the after-tax total, and save the rest. Consider investments later. Pay off debts over time with existing cash flow. Let the dust settle.
What I have seen happen to other heirs is this: in the first six months to a year of having received the windfall (large or small), they change their minds have a dozen times about what they might want to do with their money and their life, now that they have more money. Ideas come and go, some very wise and some terribly foolish. Only patience and time, combined with seasoned advice and careful consideration, can act as an effective filter.
Finally, on a very rare personal note, understand that your Uncle Byron loves him some cash and gold. The reasons for this are historical and individual. I’ve seen the ups and downs of the stock market. I’ve seen people who are rich on paper on year be broke as hell the next year.
Yes, the market does beat inflation overall over the long haul, and, managed well, it can provide financial security and even make one wealthy over time. The trick is finding a investment advisor who’s in it for your well-being, not theirs, and being able to stomach the turbulence associated with the stock market over time, and in these tricky times. And there’s no guarantee that a black swan event won’t wipe out a decade’s worth of careful investment in one fell swoop. Know that, my darlings.
Personally, I don’t care to worry about world events or stock market fluctuations. I have several sources of predictable income that more than cover my monthly expenses. And I have a stack of liquid assets that keep up with inflation, sort of, ish, but I don’t really care because I’ll probably never touch it. That’s just the way I’m made. Once cash comes in and becomes principal, it never goes out…
So I’m in a comfortable, fortunate position, but I still suggest holding cash first, then investing additional liquid after you have 12 month’s work of living expenses (or more) in the bank, even to others who are not in the same position financially.
Of course, I don’t give investment advice. But I do sleep well at night.
I look forward to being contradicted and even derided by some of our community. Please put forward your own well-thought-out advise. Share your experiences as you wish.
Thank you.
- BGT
Wonderful ♥️
I would not change a thing on the advice, Byron. Having a nest egg is preferable to wiping out debt all at once especially if there is no strain to one’s budget by continuing to make the payments on the credit card debt.
I agree with your reasoning. However, and this is the kernel, your correspondent should exercise great discipline in holding onto the cash and not be ‘tempted’. Use the same discipline to pay off the other two debts of credit card and student loan. Work that debt off and away. Debt is a cancer. I would also say keep completely quiet about that cash. Because as someone taught me, when other people know you have money available, they have plans for it, and those plans probably do not include you !
I agree with your point that retaining a lump sum of cash can be a very good way to “prime the savings pump” so to speak, and it can be very motivating to look at a large & growing sum in an account.
But I’d say if the CC or SL debt is a relatively high interest rate (call it 8%?), I’d say use a portion of the inheritance to pay those off or at least way down. High interest, unsecured debt just keeps one in an ever-descending hole and requires enormous effort, focus and capital to climb out of. BTDT.
The inheritance though can mean being free of those particular shackles at least, and allow your reader to start at ground 0. He/she can then take all that $$ he/she was spending on servicing debt (ie making banks rich), and start creating his/her own wealth.
Mortgages I keep separate because they are typically secured by the property/building, and many people have relatively good rates on them.
It would be helpful to know how old this couple is, but assuming they’re not close to retirement and assuming their earned income is enough to live on, I would certainly pay off the credit card debt because that’s always very high interest. I would probably not pay off the student loan debt because that’s probably low interest. I would then invest whatever is left in something like an S&P 500 index fund. If they’re not close to retirement and they make enough to live on they can ride out the ups and downs of the stock market and over the long run (decades) that will probably give them the best return on their investment.
If they’re getting close to retirement I would suggest something like 50% stocks and 50% bonds because it sounds like they don’t have much savings so they should put some of that money in something safe. A stock market crash when they’re young and working gives them time to recover. A stock market crash around the time they retire could be devastating if everything they have is in the market.
Again, assuming they’re not close to retirement, I say invest the money. Put that money to work and let compounding work it’s magic. The exception is the credit card debt, where the interest rate is probably higher than the long term average return in the stock market.
The psychological aspect is not unimportant, but I don’t know anything about their situation or personalities, so I’m looking at this as a financial and math problem only.
For the student debt, it might be somewhat defensible to keep it on the books instead of paying it down right away, especially if the rate is close to or less than the risk free Treasury rate of 4.something%.
For the credit card debt, though, I’d absolutely pay it down pronto. The rates are ruinous (20%? more than that?) and will blow a giant hole in your reader’s ability to build wealth over the long term. Sometimes a slap on the wrist helps drive a point home, but paying 20% interest for more than a month or two is more like a Mike Tyson punch to the face.
I think the main question in my mind re. the credit card debt is was it the result of a temporary period of unemployment, large medical bill or something like that? Or did it accumulate over time as a result of consistent spending in excess of income? If the latter, obviously a hard lesson must be learned in some way, preferably without severe damage to the reader’s long term financial security. Instead, my suggestion would be to pay off the debt, then head to the library and get a copy of The Simple Path to Wealth, by JL Collins, and read it cover to cover. That book has changed a lot of people’s lives financially and it will be a lot harder to make rookie financial mistakes after reading it.
I’d go with Byron’s advice. The lessons of paying down the debt won’t be forgotten swiftly and, if world events do take a turn for the worse, inflation could well erode the value of the debt whilst bolstering the value of any assets such as gold or property.
Thank you for sharing this thoughtful inquiry and your personal approach to managing inherited cash. I believe your advice is well-considered and rooted in long-term financial stability. Holding onto the cash for a while before making any significant decisions allows time for reflection, clarity, and careful consideration of future choices. It’s easy to be impulsive in the immediate aftermath of receiving an inheritance, but taking a step back, earning some modest returns, and continuing to pay off debt steadily can provide a much-needed financial cushion while also promoting a disciplined approach to spending.
The principle of patience, especially in regard to paying off debt and saving, cannot be overstated. As you’ve noted, emotional reactions to newfound wealth can lead to fluctuating decisions, so giving oneself the time to understand the full picture is key. I also agree with the idea that holding a cash reserve—especially in an unpredictable market—provides a level of financial security that can help weather life’s inevitable ups and downs. Your strategy of securing a solid emergency fund before diving into more volatile investments is wise and practical.
Ultimately, the decision to hold the cash and continue paying down debt while allowing time for better investment decisions seems like a prudent course. It ensures that immediate obligations are handled while maintaining financial flexibility.
Thank you, S. Your comments are much appreciated…by me and by the person who inherited…! I am really happy that everyone offered perspectives on this topic.- BGT
This is sound advice, that I would personally add a couple of caveats to.
I know this as the premium for liquidity. Holding cash when you have outstanding debt or even just lower returns is not the optimised position for your money, but I consider that for the emergency fund this is simply the cost for the insurance of having 12 months of basic living expenses covered.
This is a nuanced position however, I would argue if the credit card debt was extraordinarily high, as some are, then this needs to be weighed against the ravaging damage it is doing to your personal wealth.
That said, I would look first to lower the cost of the debt, certainly in the UK there are banks that will offer significant discounts to your interest rates (sometimes its interest free) for a period by switching your custom to them.
My second thought is that, whilst not ideal, paying off the credit card debt would still provide you access to the funds in a pinch as you can simply use the card to pay for essentials. This would be my approach if the interest rate was exorbitantly high and I was unable to lower the cost. This would be my response to the “house on fire” situation.