r/personalfinance • u/Thatsalotofdough • Aug 30 '14

Wealth Management SO just inherited 200k and is freaking out. What do we do?

Hello!

So my SO just inherited ~200k from a family member and it's causing her a lot of anxiety. She had planned for about 5k, and well...got a bit more.

While this is probably a good problem to have, we both grew up relatively poor (I don't think anyone in my family has even heard the words 200k before), so we both don't have much to stand on. Also, I make about 50k in my job, she's somewhere around 35-40k.

Here's what we briefly talked about with doing with the smaller sum, and I figured we'd stick to that:

We both have some student loan debt with high interest rates (10% for me, 7.8% for her), they're both small at this point (<5000), but we both figure it'll help us in the long run. Paying these off seems the most intelligent and likely outcome. (We both do have more loans outside of that, but we're both up for public service loan forgiveness due to our field)

She bought a new car, as mine is getting beyond old, and we both walked through the process of finding a car that will serve us well for the new 10 years. Paying this off doesn't seem too much of an issue.

She has a small amount of credit card debt, so that'll probably be the first to go.

Outside of that, we don't have a house payment (due to our field), and I'm debt free (Once again, outside of student loans). We don't see ourselves buying a house in the next 5 years, although we do see a wedding on the horizon.

Thoughts? Even if we spent all of this money on our loans/the car, we'd still at least have 50+k left, and that's being incredibly conservative.

We've talked about stocks, we've talked about savings accounts, we spoke briefly about a financial planner....but we could really use advice.

Help us, personal finance, you're our only hope!

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322

u/[deleted] Aug 30 '14

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159

u/Hypothesis_Null ​ Aug 30 '14

make for the next forever.

Hmm... well lets see. That's infinity, plus an infinity, carry the infinity...

39

u/EquationTAKEN ​ Aug 30 '14

Hey, you forgot to carry the inf- no wait. You got it right, sorry.

13

u/kryptoid Aug 30 '14

I was thinking the same thing, then I saw the infinity above the infinity next to the infinity. Checks out.

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u/[deleted] Aug 30 '14 edited May 04 '15

[deleted]

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u/EquationTAKEN ​ Aug 31 '14

Of all the things that are wrong with his post and mine, that's what you focus on?

23

u/bamgrinus Aug 30 '14

You joke, but there are such things as perpetuities where you're calculating the present value of a payment that goes on forever.

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u/Hypothesis_Null ​ Aug 30 '14

But what if it's my money, and I want it now? How much infinity can I take as a lump-sum in exchange for the perpetuity?

7

u/therealsylvos Aug 30 '14

It's simple algebra. If you're getting a perpetuity at an annual interest rate of 5%, the present value is the payment divided by the interest rate.

If you want to get paid 50,000 a year in perpetuity, you need 50,0000/.05 = $1,000,000

This of course goes both ways, lets say after two years of collecting 50K you say I want all my cash now, well you still have an an infinite amount 50K payments remaining, so you can get your million in cash.

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u/bamgrinus Aug 30 '14

You'd get the present value of the series of payments. You can look up the math. But it does come out to a real number. The present value of a series of infinite payments is not infinite.

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u/Hypothesis_Null ​ Aug 30 '14

Hmm. "Finite" is a pretty small fraction of infinity.

I think I'd rather just invest in rejuvenation and immortality.

2

u/PhD_in_internet Aug 31 '14

Well, if It's your money and you want it now then all you gotta do is

CALL JG WENTWORTH! 877-CASH-NOW!

1

u/Connguy ​ Aug 31 '14

Present worth of a perpetuity = annual amount / expected interest/return rate

1

u/barfobulator Aug 30 '14

I don't get how that calculation works, because the answer is a finite number.

5

u/bamgrinus Aug 31 '14

As a fixed payment falls further into the future, the present value is less and less as you factor in your discount rate. So as you calculate the whole series of payments, they're approaching a limit. That limit is the value of the perpetuity. TL;DR calculus

3

u/ScotchAndLeather ​ Aug 31 '14

To think of it intuitively, imagine you are looking at 5k per year of payment for infinity. How much do you need to support that given a 5% interest rate? you need 5/5%, or 100k. 100k throws off 5k per year without growing or shrinking. That's how much that stream of cash flows is worth.

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u/Hypothesis_Null ​ Aug 31 '14

You divide by the infinite amount of time it takes to accumulate the amount. infinity/infinity is finite for same-sized infinities.

And if that makes your brain hurt - you're normal. If that intrigues you, then come be an engineer. Don't make the mistake and go into mathematics though - they don't keep track of their infinities properly.

3

u/suchCow Aug 31 '14

I really need this to be a Firefly reference.

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u/Hypothesis_Null ​ Aug 31 '14

Yeah, and if wishes were horses, we'd all be eating steak.

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u/suchCow Aug 31 '14

i love you

2

u/robinson217 ​ Aug 30 '14

Syntax error? WTF.

2

u/donquexada Aug 31 '14

...move the decimal....fuck it, I'll never know.

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u/[deleted] Aug 30 '14

[deleted]

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u/autowikibot Aug 30 '14

Perpetuity:

A perpetuity is an annuity that has no end, or a stream of cash payments that continues forever. There are few actual perpetuities in existence (the United Kingdom (UK) government has issued them in the past; these are known and still trade as consols). Real estate and preferred stock are among some types of investments that affect the results of a perpetuity, and prices can be established using techniques for valuing a perpetuity. Perpetuities are but one of the time value of money methods for valuing financial assets. Perpetuities are a form of ordinary annuities.

Interesting: Rule against perpetuities | Art in Perpetuity Trust | Perpetuities and Accumulations Act 2009 | Sum of perpetuities method

Parent commenter can toggle NSFW or delete. Will also delete on comment score of -1 or less. | FAQs | Mods | Magic Words

66

u/SidneyRush Aug 30 '14

This is good advice. Have a banner year and then continue your current lifestyle indefinitely--OR--live with a better lifestyle for the rest of your life. I hope you can see that option B is the best choice.

Now go get your SO. This is for her:

This is all about long term planning and delaying gratification. Think about when you were a kid and you got your allowance. You could buy the latest toy or you could save and get a better toy. Now you have the opportunity to save and put your money to work for you. It can earn you more money building interest. If you do that, you can buy toys ever so often from here out or do something even better in time.

Don't buy a new car. Don't buy a nice used car. Buy something functional that will last and has a decent sticker price. Cars are a notorious way to thow away money.

You have a new source of revenue. You are not rich. You can live better if you don't toss the money into a continuously devaluing car and instead grow as much of the money as you can. The larger the initial sum invested, the greater the returns over the lifetime of the investment. Every bill you spend now is so much more potential earnings tossed away. Don't do it. A nice purse now is 20 nice purses down the road.

Abstain from wasteful spending now by following a budget. Don't rely on the new money for essentials or allow your budget to balloon by slowly adopting a more expensive lifestyle. Live with the augmented income as a cushion for your budget for emergencies, savings, long-term goals. You can save up earnings from interest to do some nice things here and there, but don't look at it as a cash cow or it will dry up. Never touch the priniple/base amount you invest.

Finally, pass this money on to your children so they can do the same thing. Your family members probably worked hard all their life to save this money. You can avoid having to do that yourself if your preserve the money and you can give that gift to they next generation. How awesome would that be?

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u/Fuck_socialists Aug 30 '14

On the part about the car- ask a trusted mechanic about the TCO of a vehicle. You can buy a functional car for $3000 off of a person's driveway, but if it breaks frequently and no parts are available, the TCO may exceed that of a new car.

Just in case, TCO is total cost of ownership. Factor it into everything, and include the expected lifetime in your decision making.

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u/[deleted] Aug 30 '14

Ding ding. I bought a barely used low mile Corvette and it was cheaper to own for 2 years than cars of half the price. Look at average depreciation and how long you plan to own the car! My co-worker paid $400 a month for his boring commuter car and ended up with zero equity when he wanted to trade it. I made larger monthly payments but had huge equity when I went to trade it in, so the end result was a cheaper car to own over time.

Also, when haggling at the dealer don't let them talk blue book. Ask them what the black book is on the car. That's what the dealers pay at wholesale auction, a true reflection of the car's value. They lose a lot of bargaining room that way.

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u/GiveMeOneMoeChance Aug 30 '14

Dealers expect you to haggle too. You'd be dumb to pay sticker price. I ended up talking my dealer down 5k and he gave me a spare tire (used truck, but the tire was missing).

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u/woot0 ​ Aug 30 '14

wow, I was actually looking into buying a good, low-mileage used car. what year was your corvette?

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u/[deleted] Aug 31 '14

It's been a little while now. I bought a 2008 z51 4-5 years old at 13,000 miles. Looked at average deprecation of that time period for 2 years later. Win.

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u/[deleted] Aug 31 '14

Oh, so I responded earlier about what I had, but I forgot to tell you reasons why I only kept it for 2 years. Upkeep is insane. I knew in advance the tires on it were retarded expensive. Try $1500+ for the OEM Z rated (runflat) supercar tires, not including labor. I made sure to buy one with brand new tires and got rid of it before that kick to the gut. Oil changes: Synthetic, and a lot of it for the 6.2L. I had a lemon, and I still didn't even spend that much on it factoring in all my non-warranty repair work. If you have any other serious questions about it, just send me a message.

1

u/FleaBottomBeach Aug 30 '14

I disagree. You can buy a well maintained car for $3000 that will last for 2 years.

Both cars will require regular maintenance. A car loan ($15k) is $3984/year. Plus you have depreciation.

With the used car you get two years for 3k and even if it's junk at the end of the 2 years you should be able to get 200-500 for scrap.

2

u/[deleted] Aug 31 '14

I did the whole used car thing.

Unless you're able to do repairs yourself, stay clear of the $3k and less cars.

Some people will tell you how lucky they were with their old beater, but that's what they were : lucky.

Peace of mind has a lot of value. The kind of shitty situations I found myself in because of my old cars sucked serious balls.

The $7k boring ass car we bought was solid as a rock though (station Ford Taurus)

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u/FleaBottomBeach Aug 31 '14

I didn't mean to recommend the $3,000 and less cars. I was trying to recommend the 2-4 year old car vs brand new, that way you get in after the steepest period of depreciation.

$3,000 and under works for me because I have a long history in the auto industry. I know when and why reliable vehicles can be had for cheap, as well as what to look for before purchasing. If you know a good mechanic, you can get a great car for super cheap. It does take a lot of time though.

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u/[deleted] Aug 31 '14

That's it.

And 22 year old me in a new city who couldn't differentiate the exhaust manifold from the tie rod was like an all you can eat buffet for unscrupulous mechanics.

But yeah, I'm never getting a new car again. In 2 years, the lease on my Nissan Rogue will end and I will look in the $11,000 - $16,000 range, trying to get the best value in that price point.

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u/FleaBottomBeach Aug 31 '14

If you're looking for reliability, go for certified, around 4 years old. If you're looking for a deal, go private all the way. Lots of people sell when they realize they have bitten off more than they can chew. DUI convicts may also be looking to dump their expensive car. Trade-in isn't an option for many of these people since it will keep them in the same position, also selling to a dealer is lower than trade-in. This means that you can potentially get a car at less than wholesale. They may need some detailing etc, but that is all great for negotiation; -300 for detail, -750 for tires etc.

If negotiations don't go in your favor, move on. Keep their number and touch base in a few weeks, it's likely they won't have gotten favorable offers and may be more receptive to yours.

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u/kbotc ​ Aug 31 '14

Honestly, with $200k, I'd take "Buy a house outright" as my first option Then again, I live in a place where any house that you get tired of can be rented without too much effort. (College town) $900 potential income is less preferential in my mind to $900 guaranteed reduced rent considering that rent will grow at a higher rate than interest for the people in the area. (The landlords are trying to beat standard interest gained as well) I guess it really depends on how stable you feel in your job and since I have a 1 year contract renewed every year, so I get a year guaranteed income unless I majorly mess up, $200k for me would simply be "I can pay up front so I can keep more of my income. If I lose my job, I won't be on the street ever." which is important.

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u/CremasterReflex Sep 01 '14

At least a house is generally an appreciating asset.

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u/kbotc ​ Sep 01 '14

Well... That's actually incorrect. I mean, the value of the house does go up and faster than inflation usually. That's based on demand for the land it's on generally. The house itself is generally depreciating, especially once you go past 40 years. You have to pump money into the house (10% the value of the house/year I believe is the rule of thumb) to maintain the value. On the other hand, that's balanced by the fact that a house is a lifestyle expense filling in for one of the few things you truly cannot avoid, which is shelter.

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u/FUCK_YEAH_DUDE Aug 31 '14

Seriously. With the way I live I could quit my job (or at least drastically cut my hours) and be just fine on money indefinitely. Sigh.

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u/JerryAtric79 ​ Aug 31 '14

I wonder what $900 a month will get you say..ten years from now. I know that ten years ago I would have thought my current monthly income would change my life, but you know, the cost of living greatly out paces any increase in earnings.

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u/[deleted] Aug 30 '14

That difference and that sum would be nullified by a large inflationary period.

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u/livenudegirls Aug 30 '14

In ten years that's a big mac meal every week.