My grandmother recently passed away at 95 and left me and her other grandchildren some money. After taxes, it should come out to about $40,000 each. This is more money than I’ve ever had, and I’m not sure what to do with it. I’m 29, single, and finished my master’s degree in education a few years ago. I have a mix of private and government student loans amounting to about $20,000 and a little bit of credit card debt (about $4K). I live in an expensive city and would love to own an apartment here someday. I would also love to travel, which I’ve barely ever done because I was always in school or paying for it. Finally, I feel like I should do something that honors my grandmother’s memory. I’m grateful that she lived her life in a way that gave me this opportunity.
I currently work as a teacher, so I have a pension plan through the union. (One of the only perks of my job, which is otherwise pretty thankless.) Eventually, I should be eligible for some student loan forgiveness if I continue teaching. So I am not sure if I should use this money to pay off my loans, even though I would like to have those bills off my plate. I would also like to have some career flexibility down the line, which I know requires savings — something I’ve never had before now. What should I do?
I’m sorry about the loss of your grandmother. I’m glad that one of your priorities is to honor her memory, but it sounds like you’re doing pretty well in that department already — creating a strong financial foundation for yourself is an A+ responsible choice that any grandmother would be delighted to see.
It’s rare to have a chunk of cash fall in your lap like this, and it can be your ticket out of living paycheck to paycheck forever if you choose your next steps carefully. The first, most important, and least fun thing to remember is this: Do not make any lifestyle changes right now. You might be tempted to go out and treat yourself to something nice, and I’m not saying that you can’t do that at all. But choose that treat very thoughtfully, and keep its cost under a certain percentage of your windfall (I’d recommend one to three percent, or $400 to $1,200 — significant, but not a big bite out of your funds).
Then resume life as you know it. Lifestyle creep is a slippery slope, and you’ll be amazed at how quickly $40K will disappear if you start picking up the bill for drinks, signing up for more subscriptions, and otherwise inflating your cost of living. This money gives you breathing room; don’t squander that gift by loosening your purse strings.
Okay, lecture over! The excellent news is that you seem to have a handle on your larger financial picture. Your next steps are to manage your debt, shore up your savings, and invest in a way that allows this capital to grow. For specifics, I consulted Georgia Lee Hussey, a certified financial planner and founder of Modernist Financial. (I recommend her free financial tools as well as this flow chart for additional guidance.)
Before you even touch your inheritance, educate yourself on your current financial prospects. How exactly does your teachers’ union pension plan work? How much longer will you need to stay in the public sector to qualify for Public Service Loan Forgiveness or be eligible for a higher tier of pension benefits? Your union might offer financial education programs or even free financial planning sessions; take advantage of them. You mentioned that you don’t want to teach forever, so maximize the perks of your job while you can. It’ll set you up for a smoother career transition when you’re ready and allow your inheritance to go farther.
Next, take stock of what you owe. It sounds like you’ve got a mix of debt ranging from high-interest (your credit card) to low-interest (your government student loans), and you should tackle them in that order. As soon as possible, pay off your credit-card balance in full, and then automate the payments so that you never get behind on those bills again. High-interest debt is not something you want to mess with if you can possibly avoid it.
As for your student loans: This is a little trickier. Public Service Loan Forgiveness does not apply to private student loans, so there’s no good reason for you to prolong the payback process for those, especially since you’re eager to get them off your plate. (Some people would argue that you’re better off investing your inheritance instead of putting it directly towards your student loans, but it’s tough to know for sure.) To simplify things, you should probably pay off the balance of your private student loans, but not your government student loans — let PSLF do the heavy lifting there. (Your government at work!)
In the meantime, calculate what you should set aside for an emergency fund. This is a special cache of money that you put in a high-yield savings account (mine is at SoFi, for what it’s worth) and exists solely to cover things like medical issues, loss of income, or other unavoidable and unexpected bills. Most experts say that an emergency fund should cover 3-6 months’ worth of living expenses. Considering you work in a pretty stable industry with a lot of job protections, yours could probably be on the lower end, but you do you.
Now, once you’ve covered your credit-card debt, private student loans, and emergency fund, see what money is left over. It may not be a lot, and that’s okay! The most important thing is that you’ve created a safety net for your day-to-day life. From here, you get to start thinking more about what you want 5, 10, or 50 years down the road.
This is where investing comes in. One great option is to open a Roth IRA, which is a tax-advantaged retirement account that allows you to invest up to $6,500 per year. (As for where to open it, I have mine at Vanguard; I also recommend Ellevest, which is more user friendly.) You have to keep that money invested for at least five years if you want to avoid tax penalties, but afterward, you can withdraw your earnings tax-free whenever you want. This would give you some flexibility, help your funds grow, and save you money in taxes.
If you max out your Roth IRA (i.e., hit the $6,500 limit) and have more money left over to invest, you’re ready to open a low-cost brokerage account. The reason you should do this after the Roth IRA is that regular brokerage accounts don’t have the same tax benefits as a Roth. But they are still a great vehicle for investing and growing your money. To keep things simple, you can open yours at the same firm where you keep your Roth; invest both in low-cost, well-diversified index funds.
If the previous two paragraphs have made your eyeballs dry up and fall out, just remember this: Both your Roth IRA and your brokerage account are great places to put money that you don’t need immediately (say, in the next five years) and want to grow for the future. If, in your mid-30s, you decide to do something like buy a home or change careers, then you can use these funds to do so. Or you can keep contributing to them annually and watch the numbers climb — it’s up to you. Either way, I’m sure your grandmother would be proud.