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We got an inheritance. Now what?

Chris Farrell Dec 14, 2011

Question: My husband and I recently inherited over $150,000, which is more than enough money to pay off our mortgage OR  invest for our retirement. We already have Roth and traditional IRAs set up and have an emergency fund in place. We carry less than $2,000 in consumer debt that we pay off every month or two and are in great health in our late 40s. We have no dependent children and my parents are in good health, living on their own.

My husband wants to pay off the mortgage, leaving us with very little to invest. I would like to refinance, then pay down the mortgage (20 percent?), but I prefer to put the bulk of the money “to work” via a nationally known and reputable financial services group, using a conservative and long-term approach.  The principle would be invested 50/50 in the market, bonds, etc.

What do you suggest? We are at an impasse and do not want to make any foolish decisions, but we need to do something rather than have the money just sit in a savings account.  Susan, Brookville, IN 

Answer: It’s a good money conversation you and your husband are having. You’re discussing and working through very different approaches to managing money. I wouldn’t worry about the inheritance earnings a pittance (if that) sitting in a savings account for now. The principal is safe while you talk.  

The easy personal finance questions to deal with are when an idea is wrong. For instance, someone in their mid-30s may insist they can take money out of their traditional IRA without penalty so long as it goes toward paying off credit card debt. It isn’t true. The belief that the mortgage interest deduction is so valuable that it’s a mistake to accelerate mortgage payments is misplaced. The math on interest saved from paying off a mortgage quickly compared to the impact of the deduction is compelling. 

The truly troublesome finance questions are when both people have a strong case. Or, to put it more accurately, when values collide. For example, your husband’s desire to pay off the mortgage will create greater financial security for your household. That’s a good move. The trade-off is less financial opportunity. You’re willing to take a risk and invest for greater opportunity. That’s a good move, too. The trade-off is greater financial uncertainty.   

How can we deal with the clash of financial values? One way is to compromise. As the famous 18th-century British conservative politician and intellectual Edmund Burke wrote, “All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter.” Burke’s judgment was astute (although the current generation of U.S. legislators seem to treat compromise as something wrong — a weakness — sad to say). 

In more contemporary times, Mike Rutherford, a founding member of the band Genesis remarked that, “Being in a band is always a compromise. Provided that the balance is good, what you lose in compromise, you gain by collaboration.” 

What’s true for a band holds for a relationship when it comes to money. I can imagine several different paths. For instance, perhaps you could agree on accelerating the mortgage payments so that you own your home free and clear over the next few years (5, 7, 10 years?) and invest the difference in a well-diversified portfolio of investments, from safe savings to stocks. You might well direct more than 20 percent into the home. I would turn the conversation away from an either/or dialogue to figuring out a way to make each of you comfortable with the trade-offs. 

I would also ask each other this: What are your lifestyle values and goals? Do you want to change careers, work fewer hours, move to another part of the country, and so on. If you agree on what the two of you would like to accomplish over the next stage of life, then how you divvy up the inheritance will pretty much answer itself. The money will support your values and goals. The money is simply a tool to reach those goals.

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