I Just Received $6,000. What Should I Do with It?

by Alexa Mason · 11 comments

Receiving a lump sum of money is something you think will never happen to you — until it does.

And though it will often be due to unfortunate circumstances, like a death in the family, you’ll still have to know what to do with it.

A family member recently gifted me $6,000, which was one of the largest sums of money I’ve ever received. Now I’m wondering what the smartest move is.

My current financial situation:

After getting divorced in 2012, I moved in with my dad for a few months. Frustrated by sharing a bedroom (and bed) with my two daughters, I took out a $10,000 loan against my car, purchased a trailer, and put it on land owned by my dad.

This loan was on a four-year term, with the interest hovering a little over 3%. The current payoff is right around $6,700, and it is my only debt.

My emergency fund is in place, but I wouldn’t mind having more in savings. I also just began putting my extra money in a personal investment account.

I’m now presented with a choice: Would it make the most sense to save the money, pay off debt, or invest it?

Save

Having an adequate amount of savings makes me feel comfortable. I also have other savings goals, like purchasing an investment property, towards which I could use this money.

I started freelancing full-time in October of last year, and I need to have plenty of money to back me up. Fortunately, I live a very low-cost lifestyle and am pretty confident I can earn extra money if I need to. And I haven’t had to touch my emergency fund yet, which I’m thankful for.

Normally, I’d recommend starting an emergency fund after receiving a windfall. But since I’m okay with the amount I’ve saved, I’m not sure saving more is the right choice.

Pay Off Debt

I hate payments. Hate them. To me, there’s nothing worse than writing a check and mailing someone else my hard-earned money.

That’s why I’m leaning toward putting the whole check toward my debt and just being done with it. But with such a low-interest rate and payment amount, I’m not sure it’s worth it.

If I had high-interest debt, there would be no doubt in my mind about how to spend the money. It’d be my first step (after starting an emergency fund).

Invest

There are so many options when it comes to investing. Buying stocks, investing in real estate, funding a retirement account, etc.

The returns from investing could be far more lucrative than the 3% interest I’m paying on my current debt. While paying off debt is certain, however, investing is not. As hopeful as I might be that things would work out, it’s impossible to know for sure.

What would you do if you were in my shoes — save, pay off debt, or invest?

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{ 11 comments… read them below or add one }

Keith April 2, 2014 at 8:20 am

Here is what I would do:

1 – pay down 5,250 debt
2 – add 650 to your emergency fund
3 – spend 100 on yourself or your daughters

A 3% guaranteed return by paying down your debt is a good investment. Adding to your emergency fund will help your sense of financial security. Spend a little bit because you deserve it – money is just a tool and you should be rewarded for using that tool correctly. That’s always been my philosophy at least.

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Alexa April 2, 2014 at 10:33 am

Thanks for the comment Keith. I really like this strategy.

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David Ning April 2, 2014 at 3:41 pm

Nice balance approach. I like how you are putting some emphasis on spending a little bit to reward yourself too.

A hoarder like myself can really learn from that!

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Gousalya April 2, 2014 at 10:00 am

I would echo Keith – that sounds like something I would do.

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David Ning April 2, 2014 at 3:39 pm

I hate debt as well, but I would add the sum into Roth IRA if I were in your shoes. Sure, part of the reason is because of higher than 3% investment returns over time, but the more important reason is that you need to learn how to tolerate investment volatility and also to learn investment basics.

It doesn’t take much to maintain a solid low cost index fund account, but it takes knowledge and resolve to know why the investment strategy works when markets swan dive again. And unfortunately, the only way to learn how to deal with market ups and downs is by being invested in the market with a sum that will hurt when markets go down.

Another advantage to this approach is that having the debt will keep you hating the payments, driving you to be more focused on the goal of saving/increasing income.

Oh, and since you have freelance income, earnings in the Roth IRA will forever be tax free, which isn’t a bad side benefit of course.

I like Keith’s approach as well, so there’s no right answer but what I outlined is what I would do personally.

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John from Minneapolis April 3, 2014 at 8:07 am

A 3% loan is fairly close to free money. You shouldn’t feel urgency in paying off this loan. If the monthly payments are easily manageable, then don’t sweat it — it’s only four years. If the monthly payments are pinching you, then that’s a different story.

But I’d go with an approach like David recommends. You could put more in one place and less in another, but the main point is, this is a great opportunity for you to start building long-term assets.

I would certainly put a big chunk of it in a Roth IRA, as David recommends. I probably wouldn’t put the whole amount in. I personally like a big emergency fund. So I might go 4K in Roth and 2K in emergency, or 5K and 1K. But do keep $100 and take your daughters on a nice outing, as Keith suggested!

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John from Minneapolis April 3, 2014 at 8:21 am

Also, Alexa — do you have a 529 started for college saving? This would be a great opportunity to open one. Start off with $500 for each daughter and then start an automatic transfer each month.

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Sofia April 3, 2014 at 10:20 am

Hi David,
I have 90,000 in the bank and don’t know what to do with it. HELP…. I’m scared of investing but know I need to do something. Any advice?

sofia

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David Ning April 3, 2014 at 12:46 pm

You need to get “un-scared” of investing. How about putting some in CDs while setting aside a bit for the market so you can get used to seeing the value go up and down?

The reality is that equity markets offer the best way for the average person to earn a decent return, but you need to be comfortable with the volatility and the small (almost zero, but not zero) chance that you will suffer permanent lost.

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Alex @ Credit Card XPO April 4, 2014 at 9:11 am

I had a similar dilemma 2 years ago. I had some money invested in the stock market but I wasn’t too happy with the volatility and the return I was getting. I also had a 30-year fixed mortgage with 5% interest rate. I didn’t like to worry about the stock market and paying over $10k/year in interest to the mortgage company, I liquidated all my stocks and used the money to paid off the mortgage. Could I have not done that and try to get better return with other investments? Probably. But to me, nothing beats the feeling of mortgage free!

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David Ning April 5, 2014 at 9:50 am

Whether to pay off the mortgage or invest is an age old debate that no one will ever be able to settle. But for sure, there’s no feeling like being debt (including mortgage) free! You did good there!

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