I recently received an inheritance of several hundred thousand dollars. We have got a small mortgage ($150K) and outstanding debt of 90K (car, credit cards etc). Both my husband and I are mid 40’s and work and bring in about $110k per year together. Should we use the money to pay off debt and mortgage or should we invest it? Are there any better options?
Tracey in Gosford, NSW
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thanks for your question. This is a dilemma for many people when a lump sum comes in, and ask, what is best to do with it? Although there are a lot of facts, I do not know about you and your husband, such as your long-term goals and objectives, which would influence any specific advice, so I would make the following general points.
As a rule, we would suggest paying off your highest interest non-tax-deductible debt first, that may include credit card, and then a car loan. If that leaves you with some surplus, it might be a good idea to put that surplus in an offset account against your mortgage. An offset account will allow you to save on interest but also give you a small cash buffer in the event of emergency.
This course of action should free up your surplus cash flow as you will not be paying high interest credit card debt or car loan repayments. This means you may have a surplus of cash from your salary, to pay extra off your home loan or consider investments outside of super for your long term. Freeing up the cashflow may even give you the capacity to evaluate some tax effective long-term strategies like salary sacrificing into superannuation.
Another benefit of paying off credit card debt and car loan debt, is it strengthens your financial credit position if you wanted to go for another loan, eg for a house upgrade, or purchase an investment property.
To decide if any of these strategies are suitable for you, it would be very useful to do a detailed personal budget of inflows and outflows, don’t get stressed about having the budget perfect, just try and gain an understanding of exactly where your money goes. This would then help you decide whether you have surplus cash from paying off this non-deductible high interest debt to be able to continue to invest. Although it is not a nice thing to receive inheritance, from a loss of a loved one, it does give you the opportunity to give yourself a little catapult forward in terms of securing your financial position with less debt. This gives you options to be able to use the cash flow you receive from your income more wisely. I would strongly encourage you to seek help from a financial planner who can discuss your important long-term objectives and how actions in the short term may help you get there more efficiently.
Good luck with the future!
Regards, Anthony Roe, Financial Advisor Adelaide.
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