Wisest way to use inheritance...

[jbx10]

My DH is expecting a fairly large amount of inheritance. We are just unsure how to use this money to best help our future. We are both under 30 and have a DD 18months old. Our options are:
Use the money to pay off 3/4's of our mortgage.
Pay off credit card debt and put the rest into savings For us and our DD
Save it all and use the money when we eventually look to move house (in the next 2 years hopefully)

Neither of us like the idea of having debt hanging over us and our initial thoughts were to pay credit card debt off. But with interest rates rising on the mortgage, i wonder if it is best used to pay the majority of that. Our credit cards are 0% for over 3years.

Read some books on personal finance, such as Total Money Makeover - Dave Ramsey, The Meaningful Money Handbook - Pete Matthew.
Those will go though a process of getting finances in shape. Generally that involves being on a budget, paying off debt, having an emergency fund, investing for children and investing for yourselves.

Changing money mindset is important. You don't want to pay off debt to then go back in to debt. A danger with getting a lump sum and paying off debt with it is that it makes no change to your behaviour... you just keep on going back in to debt. So start paying off debt now, then use the inheritance to complete the debt payoff.

Mortgage is secured debt, but is still debt and rates are going up, so reducing mortgage is an option to look at. I would focus on paying off the credit cards and other debts of that type first... car loans, personal loans, anything like that.

Think about what the person giving the money would have wanted. They may have wanted you to enjoy some of it, to use some wisely, to use some for your child's future. So you may want to split it up - some to paying off debt, some to investing for child (such as Junior ISA), some for enjoyment.

@nannynick thank you for your advice. I will certainly have a look into those!

Agree with @nannynick , I think it is important to consider what the person leaving your DH the bequest would have wanted. Paying down the mortgage, so increasing ownership of a tangible asset and giving you greater security in a very, very uncertain world - that feels like something a relative might have wanted for their bequest. Setting up a fund for your DD likewise.

By substantially reducing your mortgage payments, this should free up more of your regular money to clear your credit card debt. Do you know how that accrued? As you say you don't like having debt hanging over you, how did you end up with credit card debts in the first place? (I appreciate there could be a host of reasons outside your control, particularly over the last few years). I think not paying that off with a windfall could be psychologically quite important to avoid it building up again.

It kind of depends on the figures but I would pay debt, mortgage, save and splurge some.

• I would first put circa £20k in instant access savings (roughly 6 months of our net income).
• Then I'd pay off all debt other than mortgage. If it's on 0% then this technically wouldn't be the 'best' thing to do...but I don't think you can underestimate the mental wellbeing effect of being totally debt free so for me, I'd prioritise that.
• I'd spend a bit. In our case, about £5k on a car and the same on a fantastic holiday or two.
• With the rest, I'd start overpaying the mortgage at whatever amount is allowed (max 10% a year I think if on fixed) with an aim to get the LTV as low as possible before moving.

0% credit card may seem like a good idea but it is still debt. If you are not paying that off every month, there comes a time when you will pay interest.

It is a money mindset thing. You are borrowing money to pay it back later when you already have the money, so why borrow. I have a credit card, it is used occasionally, such as I find it useful for hotel bookings, but it is a tool to use for those times when using a debit card may not be available. You need to be aware of the danger, the ease of building up debt which can then become unmanageable.

Pay it off, try not to use it, see how it goes and see how you feel. It feels much better being debt free than having that debt, even if it is 0%. Use this opportunity to wipe the slate clean, whilst keeping in mind that such an opportunity may not come along again, so do not go back to building up debt.

Mortgage is interesting at the moment as you may be on a fixed rate of less than you can get interest on cash. There are 1 year fixed savings accounts paying around 4%.

However chipping away at a mortgage can be very rewarding as you see the amount owed drop and if your lender keeps the payments the same then more of your payment goes to paying off capital.

MSE has a mortgage repayment calculator that is useful for seeing how an overpayment can reduce the length of the mortgage.

Keep in mind that mortgage rates are going up so when you move, or a fixed rate ends, then your rate will increase, possibly by quite a lot.

One of the things Dave Ramsey etc mention is that ethically/morally someone else's life savings shouldn't be used to pay off your frivolous consumer debt. It sounds quite tough, but there's something in it, along the lines of the lesson isn't learnt as it's too easy.

So in your situation, your inheritance would be used to pay off your mortgage, and then anything over would be invested (for example, top up your pension contributions - now is a good time whilst the market is low). Then with your earnings, prioritise paying off your credit cards and loans (look up the snowball method).

Such a nice situation to be in OP!

We have had similar recently Op. Paid our mortgage and debts off and now need to take time thinking about the rest of the money and best use of it.

Totally understand the comments about paying debt off in a lump sum only being really useful if your mindset has changed and you aren't just going to accrue more debt. For us, we had been working several years to bring our debt down and in fact it was a much smaller sum than it was a few years ago.