Here is a question from a Money Crashers reader. She is in a great situation, because she has a nice lump sum of money, but she doesn’t know what to do with it.
My home is worth about $375000 and I owe $62000 on it. My credit card debt is $21000 ($11000 at 3.99% for life of loan and $10000 at 10% until 11/08) and school loans of $10000. I am recently widowed and am struggling month to month with my bills. I have a lump sum of $80000. Should I pay off the credit cards and school loans which would decrease monthly payments by about $700? Thank you.
My Answer: First of all, thanks for being a reader. I answer all reader questions based on what I would do. It’s merely my opinion and you can take it for what it’s worth. I always answer these questions by evaluating what plan of action will help you reduce the most amount of risk in your life. With an $80k lump sum, I would definitely pay off the the credit cards and student loan first. You’ll be debt free, except the house, and you’ll free up a huge amount of monthly income. That extra $700 will be great to have for a single mom who is working paycheck to paycheck right now. With the remaining amount, I would set aside four to six months worth of monthly expenses for an emergency fund. Then, if you haven’t started saving for retirement, open up a ROTH IRA and fully fund it for 2008. You’ll, still probably have about $25k after all of this. You can then invest the rest in index funds that follow the S&P 500 such as the Vanguard 500 or pay down some of your mortgage. If you’ve done all of the other steps first, what you do with the extra $25k is not a huge deal. Even if you wanted to set aside $5k for a vacation or to just have some fun with, that’d be fine too!
Readers, please post your suggestions with what this reader should do given her situation.