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Should you Use an Inheritance to Pay off Debt?

  By April 29, 2013

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Two weeks ago, we were staring down a $57,000-plus student loan. We had a plan to put most of our extra money toward this whopper of a debt to wipe it out over the next few years. But it was going to be a long haul.

Today, we are debt free. This unexpected turn in our debt repayment journey came via an inheritance we got from my husband’s grandma. As the blog Frugal Dad points out, there’s often a lot of emotion wrapped up in getting an inheritance because you’ve just lost a loved one. It’s not always easy to decide what to do with it, especially when your decision-making skills are clouded by sadness, guilt or other emotions.

So, how do you know if you should use an inheritance to pay off your debt? For us, it was an easy decision: The loan had been a burden for years with a staggering 9 percent interest rate. That meant we were paying Sallie Mae more than $350 per month in interest alone. It was very hard to dig out of this debt — and suddenly we had the chance to erase it.

If you’re considering paying off debt with an inheritance, here are some factors to consider:

1) How did you get into debt in the first place? As Frugal Dad points out, if you got into debt by, say, going on shopping sprees with your credit cards, paying off your current debt without changing your ways isn’t going to help much.

2) Do you have an emergency fund in place? Not everyone gets into debt by buying one — or 100 — pairs of Manolo Blahniks. For many people, it’s that car repair they didn’t plan on or a kid getting sick. If you don’t have an emergency fund, it would be wise to create one first, then look at paying off debt.

3) Would it be smart to meet with a financial adviser? If you’re not sure what’s the best use of your money, it’s probably a good move to meet with a fee-only financial adviser, Consumer Reports recommends. You can find an adviser who works only for fees paid by clients — no commissions from financial services companies for selling you products — by visiting the website of the National Association of Personal Financial Advisors, an association of fee-only advisers.

4) Should you wait a little while? As personal finance writer Craig Guillot points out on his blog Some Stuff About Money, many people make rash decisions about inheritance money. Like winning the lottery, it’s easy to make big mistakes when a large, unexpected sum of money is involved. There’s nothing to lose by taking some time to think through all of your options and crunch the numbers. If you go this route, consider taking this advice from Consumer Reports: Put the money in a separate savings account and not your main checking account, so that it’s not too easy to spend.


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