What to do with windfall

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lassevirensghost
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What to do with windfall

Post by lassevirensghost » Tue Nov 06, 2018 4:06 pm

My wife (32) and I (31) will receive a windfall of about $50k from the sale of a small family farm within the next few months. We have a few things going on, so I am not quite sure what to do with it. Before the windfall, we have assets of $31k and student loans of $89k (expensive undergrad and PhD), as broken down below. Annual income between us is about $90k. Two kids, 3.5 years and 1 year old.

We would obviously like to get our debt paid down quickly (and considering that we started with about $120k in student debt a few years ago, we are doing OK), but we would also like to have a down payment for a place. This may be in a fairly HCOL area (Queens, NYC). That would probably be 2 or 3 years from now. We may move elsewhere too, just depends on some things having to do with family. I figure we would need at least $50k for a down payment, and that would still be less than the traditional 20%. Currently, we live in a LCOL area in the midwest and rent for a very cheap price. We are trying to get out — it is my wife's hometown and she can hardly stand being here. (And we used to live in Queens for a bit.) Still, it is an OK place to build up some financial stability since I have a decent job. I also want out, as what I do requires more travel than I want to do with little ones. I am considering going back to teaching. I used to teach political science at the university level and am now in a good administrative position at a small school.

Here is a breakdown of our current situation. Net worth is about $58k in the red:

Assets
Total - $31k
e-fund - $11k
checking - $5k
My 403b - $6k
My tIRA - $5k
HSA - $2k
daughter 529 - $3k

Investments are in a 70/30 AA, much of it VT and BND. Work plan is in a global equities fund that tracks ACWI, as well as TIAA Trad. (I have a pretty awesome portfolio thanks to BH! :D )

Liabilities
Student loans totaling ~ $89k, broken down as follows:
Student loan 1 - $51k @ 5.65% (payment is $579)
Student loan 2 - $14k @ 4.85% (payment is $135)
Student loan 3 - $11k @ 6.35% (payment is $113)
Student loan 4 - $10k @ 5.75% (payment is $80)
Student loan 5 - $3.5k @ 5.65% (payment is $35)

EDIT: we also have about $5k in medical debt (from having terrible insurance with our first daughter) that I have been treating more as an "expense" since it is interest free payments.

No consumer debt. No credit card debt. Car paid off. Rent our house. Etc.

I guess I am just wondering how much of this should go to loans, and how much toward building up our future. I know that we don't have to make any decisions overnight, but we really think that this money is a jumpstart that can put us forward several years ahead of what we could have done on our own. So we want to do it right.
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Flyer24
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Re: What to do with windfall

Post by Flyer24 » Tue Nov 06, 2018 4:16 pm

I would put all of it towards student loans. Personally, I would seek a job with better income to utilize that PHD.

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Meg77
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Re: What to do with windfall

Post by Meg77 » Tue Nov 06, 2018 4:16 pm

Congrats on the windfall. I think I'd allocate the money as follows:

$6000 - Roth IRA contribution (you)
$6000 - Roth IRA contribution (spouse)
$6900 - HSA contribution
$11,000 - pay off 6.35% student loan
$10,000 - pay off 5.75% student loan
$3,500 - pay off 5.65% student loan

$6600 remaining - take a family vacation and use the rest to top off savings.

:beer
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delamer
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Re: What to do with windfall

Post by delamer » Tue Nov 06, 2018 4:20 pm

Getting rid of student loan 1 is a good choice, since it would free up so much cash flow (which could be saved) and the interest rate is pretty high.

How long do you have to pay on each loan if you pay the minimums?

lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Tue Nov 06, 2018 4:23 pm

Flyer24 wrote:
Tue Nov 06, 2018 4:16 pm
I would put all of it towards student loans. Personally, I would seek a job with better income to utilize that PHD.
I thought I had done that already! Kind of kidding but really. I was making mid 50k as a professor and switched to fundraising, now making 80k. My wife brings in a bit here and there through some gig work. My PhD is more situated within the humanities, so really I am already doing pretty well with it, unfortunately.
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lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Tue Nov 06, 2018 4:26 pm

delamer wrote:
Tue Nov 06, 2018 4:20 pm

How long do you have to pay on each loan if you pay the minimums?
The big chunk ("Student loan 1") is a bit less than 10 years. The others are around 12 years.
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Flyer24
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Re: What to do with windfall

Post by Flyer24 » Tue Nov 06, 2018 4:31 pm

lassevirensghost wrote:
Tue Nov 06, 2018 4:23 pm
Flyer24 wrote:
Tue Nov 06, 2018 4:16 pm
I would put all of it towards student loans. Personally, I would seek a job with better income to utilize that PHD.
I thought I had done that already! Kind of kidding but really. I was making mid 50k as a professor and switched to fundraising, now making 80k. My wife brings in a bit here and there through some gig work. My PhD is more situated within the humanities, so really I am already doing pretty well with it, unfortunately.
Ok. I didn’t realize most of the family salary is your income. I was thinking your wife probably brought in 30K or so.

delamer
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Re: What to do with windfall

Post by delamer » Tue Nov 06, 2018 4:35 pm

lassevirensghost wrote:
Tue Nov 06, 2018 4:26 pm
delamer wrote:
Tue Nov 06, 2018 4:20 pm

How long do you have to pay on each loan if you pay the minimums?
The big chunk ("Student loan 1") is a bit less than 10 years. The others are around 12 years.
Then I’d pay #1 off — not down, but off — with the windfall.

Flyer24
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Re: What to do with windfall

Post by Flyer24 » Tue Nov 06, 2018 4:39 pm

delamer wrote:
Tue Nov 06, 2018 4:35 pm
lassevirensghost wrote:
Tue Nov 06, 2018 4:26 pm
delamer wrote:
Tue Nov 06, 2018 4:20 pm

How long do you have to pay on each loan if you pay the minimums?
The big chunk ("Student loan 1") is a bit less than 10 years. The others are around 12 years.
Then I’d pay #1 off — not down, but off — with the windfall.
I agree. Then take that $579 payment and roll it into the next loan payment. This is the snowball method of focusing on one loan at a time.

TSR
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Re: What to do with windfall

Post by TSR » Tue Nov 06, 2018 4:40 pm

I find myself agreeing with Meg AND delamer, despite their different recommendations. Meg's point (reading between the lines) is that kickstarting your retirement savings is equally as important as paying down those debts. The debts feel high, but you're losing access to use-or-lose retirement space every year you're not maxing it out. So one way to do it is to use this money to contribute while reducing your highest-interest loans (as suggested by Meg). Another is to knock out the highest-dollar loan (as suggested by delamer) and use the freed up cash-flow to increase funding in your retirement accounts. Everyone wants to buy a house, but I respectfully do not believe you should tack on hundreds of thousands of dollars of additional debt while your retirement accounts are so low and your student loans are so high. (You should also pump the brakes on the 529s -- you or your kids can take out college loans, but you can't take out loans for retirement.)

You guys have a good start, so just keep at it!

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BL
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Re: What to do with windfall

Post by BL » Tue Nov 06, 2018 4:45 pm

Suggest you read the wiki page on Windfalls. No harm in leaving it in cash (MM, short CDs, savings) for a while.

My first thought is to pay off the big student loan with the highest payment. Getting the largest payment out of the way very quickly might feel really good, then work on rest, either smallest first or highest interest, paying extra to only one until gone. With freed up payment, Roths, HSA, emergency fund, 401k, etc., also could use some cash.

Perhaps your spouse could work more to save up for a house. I don't see that you can afford it yet on your income. I would leave 529 until debts and retirement are caught up.

lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Tue Nov 06, 2018 4:45 pm

TSR wrote:
Tue Nov 06, 2018 4:40 pm
I find myself agreeing with Meg AND delamer, despite their different recommendations. Meg's point (reading between the lines) is that kickstarting your retirement savings is equally as important as paying down those debts. The debts feel high, but you're losing access to use-or-lose retirement space every year you're not maxing it out. So one way to do it is to use this money to contribute while reducing your highest-interest loans (as suggested by Meg). Another is to knock out the highest-dollar loan (as suggested by delamer) and use the freed up cash-flow to increase funding in your retirement accounts. Everyone wants to buy a house, but I respectfully do not believe you should tack on hundreds of thousands of dollars of additional debt while your retirement accounts are so low and your student loans are so high. (You should also pump the brakes on the 529s -- you or your kids can take out college loans, but you can't take out loans for retirement.)

You guys have a good start, so just keep at it!
I totally agree. Both Meg and delamer gave opinions that I was thinking of as the main alternatives. I put out the down payment concern because I know it is just something we are yearning for. But we can always rent. Always have and no problem with that.

The 529 stuff was done right when my first was born. Much of my investing education has happened over the past two years and I just thought I was doing the right thing. I'll also admit that it was a (quite irrational) determination to not do to her what my parents did to me by promising to help and then doing nothing for college.

Thanks for the encouragement! We have knocked so much off our negative net worth in the short amount of time that I have been getting into this!
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GlacierRunner
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Re: What to do with windfall

Post by GlacierRunner » Tue Nov 06, 2018 4:47 pm

I too would be interested in paying off loan #1. It's easier to start piling up cash for a down payment when you are out of the hole.

However, this is from the proceeds of a family farm. Are there any unspoken expectations about what such a legacy should be used for? If this is grandpa's farm and he valued education, or saving or recreation, how can you honor that? If grandma sent you a little money each year for "fun" you might want to use 5-10% of the funds for something fun. If grandma would have paid for your college tuition if she could have, you might put it toward student loans and acknowledge that she did just pay for your college experience. If grandpa invested in the stock market, you might use some of the money for an IRA.

lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Tue Nov 06, 2018 4:47 pm

BL wrote:
Tue Nov 06, 2018 4:45 pm
Suggest you read the wiki page on Windfalls. No harm in leaving it in cash (MM, short CDs, savings) for a while.

My first thought is to pay off the big student loan with the highest payment. Getting the largest payment out of the way very quickly might feel really good, then work on rest, either smallest first or highest interest, paying extra to only one until gone. With freed up payment, Roths, HSA, emergency fund, 401k, etc., also could use some cash.

Perhaps your spouse could work more to save up for a house. I don't see that you can afford it yet on your income. I would leave 529 until debts and retirement are caught up.
Thanks, and totally agree. I had read the wiki and took away that it was important to give things time, not to make rash decisions. I definitely will do that. Just wanting to think ahead some.
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lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Tue Nov 06, 2018 4:50 pm

GlacierRunner wrote:
Tue Nov 06, 2018 4:47 pm
I too would be interested in paying off loan #1. It's easier to start piling up cash for a down payment when you are out of the hole.

However, this is from the proceeds of a family farm. Are there any unspoken expectations about what such a legacy should be used for? If this is grandpa's farm and he valued education, or saving or recreation, how can you honor that? If grandma sent you a little money each year for "fun" you might want to use 5-10% of the funds for something fun. If grandma would have paid for your college tuition if she could have, you might put it toward student loans and acknowledge that she did just pay for your college experience. If grandpa invested in the stock market, you might use some of the money for an IRA.
That is a very important point to both me and my wife. This was her father's family farm. He passed in 2010 and his sister just passed this year.

We believe he would have wanted us to use it for a house (he had done similar things for older siblings of hers while he was living). That also is part of why I said what I did about the house in the OP.

He also was an estate planner and a very savvy (kind of BH-style) investor. He helped his clients avoid the tax man through charity and investment decisions. I am sure he'd be OK with us making some sound investments with it, too. :beer
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Watty
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Re: What to do with windfall

Post by Watty » Tue Nov 06, 2018 4:51 pm

There is a wiki on managing a windfall and one of the things that is encouraged is to just put it someplace ultrasafe for at least six months while you decide what to do with it.

https://www.bogleheads.org/wiki/Managing_a_windfall

lassevirensghost wrote:
Tue Nov 06, 2018 4:06 pm
My wife (32) and I (31) will receive a windfall of about $50k......
Most likely just one of you is actually receiving the windfall.

For example if it was from your wife's family and you use it to pay off your student loans then you could be in an awkward situation if you get divorced in a few years. Be sure to have a frank discussion to make sure that you are both comfortable with the situation if that is a factor.

If there is a problem with that then you may want to keep the money invested in a seperate account in that persons name.

You might also want to check on your state laws and have some sort of postnuptial agreement on how those funds will be handled.
lassevirensghost wrote:
Tue Nov 06, 2018 4:06 pm
I guess I am just wondering how much of this should go to loans, and how much toward building up our future.
If you are both OK with it then I would just pay off the loans and then save your "loan payment" each month.

If you move in a few years then you would likely want to rent for at least a year in the new city before you buy to make sure that the new location and jobs are really working out OK. That would give you another year to save up home down payment.

lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Tue Nov 06, 2018 4:55 pm

Good points, Watty. It is her windfall but we tend to think of our lives as one unit. I suppose divorce could be a concern, although neither of us has ever felt that way. We have joint accounts on everything except our retirement accounts, since those have to be that way.

I don't think she would want to make a postnuptial agreement. Actually I know the very idea would upset her. Me too, though I matter less in this case.

Very good point on the new city.
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TSR
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Re: What to do with windfall

Post by TSR » Tue Nov 06, 2018 4:57 pm

lassevirensghost wrote:
Tue Nov 06, 2018 4:45 pm
I'll also admit that it was a (quite irrational) determination to not do to her what my parents did to me by promising to help and then doing nothing for college.
Not irrational at all. Nobody wants to saddle their kids with debt. You'll be happy to have that money growing, and it'll be nice to contribute to it when you're better able to (maybe some grandparents can help at some point as well). But the best way to pay for college is probably just out of your income, which will feel a lot more possible once you've eliminated the debt and got a nice retirement cushion going. Don't forget that you don't have to fund all of college beforehand -- assuming your income is still good and you're in a good position with retirement, you can keep paying off the student loans (in whoever's name they might be) after college is through.

gclancer
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Re: What to do with windfall

Post by gclancer » Tue Nov 06, 2018 5:05 pm

Meg77 wrote:
Tue Nov 06, 2018 4:16 pm
Congrats on the windfall. I think I'd allocate the money as follows:

$6000 - Roth IRA contribution (you)
$6000 - Roth IRA contribution (spouse)
$6900 - HSA contribution
$11,000 - pay off 6.35% student loan
$10,000 - pay off 5.75% student loan
$3,500 - pay off 5.65% student loan

$6600 remaining - take a family vacation and use the rest to top off savings.

:beer
+ 1 with one caveat did you have an HSA at the time you incurred the referenced medical expenses?

lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Tue Nov 06, 2018 5:18 pm

The HSA is from that time, but the 2k in it is much more recent. I don't think I can put that toward those expenses since they were incurred before the funds were deposited?
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Darth Xanadu
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Re: What to do with windfall

Post by Darth Xanadu » Tue Nov 06, 2018 5:21 pm

TSR wrote:
Tue Nov 06, 2018 4:57 pm
Don't forget that you don't have to fund all of college beforehand -- assuming your income is still good and you're in a good position with retirement, you can keep paying off the student loans (in whoever's name they might be) after college is through.
This is an excellent point, and one that sometimes seems to be overlooked in all the discussions about best vehicles for saving for college.

I appreciate OP's comment about spouse's father, but I have to agree with others that the best use of this windfall is not a down payment, but rather to pay down debt or pad retirement (good point earlier, also I think by TSR, about "use it or lose it" tax advantaged space each year), or a combination of those two.

OP, you made the observation that your father-in-law was an astute investor and savvy with tax-saving tactics, so I would venture to guess that making the decision to pay down debt or shelter income would have been met with approval.
"A courageous teacher, failure is."

Flyer24
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Re: What to do with windfall

Post by Flyer24 » Tue Nov 06, 2018 5:23 pm

lassevirensghost wrote:
Tue Nov 06, 2018 5:18 pm
The HSA is from that time, but the 2k in it is much more recent. I don't think I can put that toward those expenses since they were incurred before the funds were deposited?


As long as the expense occurred after the account opened then you can use them. It doesn’t matter when the money is deposited.

gclancer
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Re: What to do with windfall

Post by gclancer » Tue Nov 06, 2018 8:22 pm

Flyer24 wrote:
Tue Nov 06, 2018 5:23 pm
lassevirensghost wrote:
Tue Nov 06, 2018 5:18 pm
The HSA is from that time, but the 2k in it is much more recent. I don't think I can put that toward those expenses since they were incurred before the funds were deposited?


As long as the expense occurred after the account opened then you can use them. It doesn’t matter when the money is deposited.
+ 1 You should fund the $6,900 HSA contribution with your salary, if possible (to receive the FICA tax deduction), to pay off the medical debt as it comes due. Keep the windfall cash in your checking account to subsidize the lower paychecks. Also, you can reimburse yourself for any of the medical debt you’ve paid off so far with non-HSA money.

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8foot7
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Re: What to do with windfall

Post by 8foot7 » Tue Nov 06, 2018 9:31 pm

No question, pay off the student loans. The loans that remain you should attack with the snowball created by the massive payment you’ve freed up. Then worry about Roths and all of that mess; when you start spreading it to six different places and then a vacation you very seriously blunt the effectiveness of the modest windfall.

Re: the house — here’s the thing, you already bought your house. It’s just called your college education and you still owe $89,000 for it. Pay that house off before you buy another one.

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BL
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Re: What to do with windfall

Post by BL » Wed Nov 07, 2018 9:03 am

In the case as you described, I can see funding her Roth as a way of honoring her benefactor, yet still being available for real emergencies (contribution only). That would delay the loan pay-off a bit, so it is more emotional than practical.

Check into that HSA debt payoff.

gclancer
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Re: What to do with windfall

Post by gclancer » Wed Nov 07, 2018 12:21 pm

BL wrote:
Wed Nov 07, 2018 9:03 am
In the case as you described, I can see funding her Roth as a way of honoring her benefactor, yet still being available for real emergencies (contribution only). That would delay the loan pay-off a bit, so it is more emotional than practical.

Check into that HSA debt payoff.
+1 your efund is already conveniently at $11k, so you can simply shift this inside of a Roth IRA and hold it there for future investment (hopefully you won’t have to tap it) rather than in a traditional bank account. For example, you could hold the Roth IRA money in online savings at Ally Bank.

MJS
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Re: What to do with windfall

Post by MJS » Wed Nov 07, 2018 1:23 pm

Meg77 wrote:
Tue Nov 06, 2018 4:16 pm
$6000 - Roth IRA contribution (you)
$6000 - Roth IRA contribution (spouse)
:?:$6900 - ... put towards other 5.65% loan
$11,000 - pay off 6.35% student loan
$10,000 - pay off 5.75% student loan
$3,500 - pay off 5.65% student loan
...
+1. Grow your retirement now. Others have commented on the HSA contribution. Pay off the higher interest first.

I would honor your wife's grandfather, and her wish to relocate, by putting the remainder in a We Are Going to Go Away taxable acount. If she has a dream, a windfall is the tool to make it happen.

Pilotdude1984
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Re: What to do with windfall

Post by Pilotdude1984 » Wed Nov 07, 2018 2:11 pm

Just got done reading Dave Ramsey's Total Money Makover (highly recommend it). Me personally, I'd attack those high-interest student loans and suffer in a small town until its complete. If you're moving to an extremely expensive area like NYC it's going to make it harder to pay off that interest. Look up an amortization calculator making your current payments towards those student loans and see how much you're actually paying the bank towards interest, its sickening.

carmonkie
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Re: What to do with windfall

Post by carmonkie » Wed Nov 07, 2018 2:51 pm

Using some psychology here, I would personally feel better tackling one loan rather than seeing I still have 4 more to go.

Your total balance on loans 2-5 is 38.5K and the payments are $363/mo
If you use $38.5K to those loans you still have $11.5K left that you can allocate towards the big loan leaving a balance of $39.5K.

Then use 363 and add it to the big loan payment that now has smaller balance. You'd be making payments of 942 towards one single loan and you could tackle it in maybe 3-4 years? Probably same time if you paid the big loan first.

I know it is contrary to what was suggested, but seeing 4 loans gone might be a moral booster too.

Also make sure and be careful that the payments are correctly allocated to the principal.

Jack FFR1846
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Re: What to do with windfall

Post by Jack FFR1846 » Wed Nov 07, 2018 3:09 pm

Flyer24 wrote:
Tue Nov 06, 2018 4:16 pm
I would put all of it towards student loans. Personally, I would seek a job with better income to utilize that PHD.
^this

Kill loans 3,4,5, then apply the rest to reduce 1. This is Avalanche method and as an engineer, I do math, so don't understand why anyone would do this any other way.
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lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Thu Nov 08, 2018 9:20 am

Thanks everyone, I will definitely refer back to this thread when the time comes!
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lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Thu Nov 08, 2018 9:32 am

Flyer24 wrote:
Tue Nov 06, 2018 5:23 pm


As long as the expense occurred after the account opened then you can use them. It doesn’t matter when the money is deposited.
One more question about using the HSA funds to eliminate the medical debt. Does it matter that I had a PPO in the intervening years? I am back on a HDHP with another employer and using that same HSA.
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Dottie57
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Re: What to do with windfall

Post by Dottie57 » Thu Nov 08, 2018 1:27 pm

delamer wrote:
Tue Nov 06, 2018 4:20 pm
Getting rid of student loan 1 is a good choice, since it would free up so much cash flow (which could be saved) and the interest rate is pretty high.

How long do you have to pay on each loan if you pay the minimums?
I agree with getting rid of loan 1 since cash flow is much better. Also agree with getting better paying job for so much education.

p.s. now I think getting rid of all but #1 is best. And makes life simpler.
Last edited by Dottie57 on Thu Nov 08, 2018 1:40 pm, edited 1 time in total.

time>money
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Re: What to do with windfall

Post by time>money » Thu Nov 08, 2018 1:39 pm

This is probably contrary to boglehead philosophy, but I would seriously consider the impact that the rumored Amazon site in Queens will have on property values there. If this does come to pass, I would look at relocating sooner rather than later, and use the windfall for the down payment. If that doesn’t work for you, then I would pay off high interest student loans first.

lassevirensghost
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Re: What to do with windfall

Post by lassevirensghost » Thu Nov 08, 2018 8:44 pm

time>money wrote:
Thu Nov 08, 2018 1:39 pm
This is probably contrary to boglehead philosophy, but I would seriously consider the impact that the rumored Amazon site in Queens will have on property values there. If this does come to pass, I would look at relocating sooner rather than later, and use the windfall for the down payment. If that doesn’t work for you, then I would pay off high interest student loans first.
Hey if you aren't really doing it just for that reason but because you would anyway, why not?
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