A gift of “ Money”. Is there anything better? I mean, it’s not like you’re likely to return it, or dislike it because it’s “ just not you”. It’s the next best thing since “sliced bread” or a Roth Ira. And it’s so versatile; you can spend it, save it, pay down some debt, invest in your future…. so many uses. But, is there any “best” way to use a gift of Cash?
The answer of course is, No… but there are many great ways to use it and they depend on your own personal view about money. Some folks see “found money” as a way to purchase something they otherwise would not, but after all, its “found money”. Another would choose first to pay down Debt, (like it’s the dirtiest word in the English language). In any case, the decision is up to the receiver of such a gift. And, just as there are many different ways to handle one’s finances; there are equally as many different ways to use a Money Gift.
I, for one, have a habit of viewing as many angles as possible before making a decision, in particular, about finances. Some people, if asked, would know right away what they would do…. Haven’t we all dreamed of what we’d do if we won the lottery? It’s the same thing here.
Many gifts are relatively small, as in $10 in a birthday card or $50 at graduation. But what about a sizable gift like $2,000, $5,000 or $10,000; the kind you might find as a result of a wedding or inheritance! These amounts are substantial and can make a significant impact on your finances. One may be inclined to “lump sum” the gift on a mortgage or auto loan; but unless it pays the loan ”off”, next months payment is still due, you’ll just pay fewer months.
For the sake of example: you have a car loan, balance=$11,000 ($300 monthly payment); a mortgage balance=$85,000 ($800 monthly); a student loan balance= $5,000 ($125 monthly). On the savings side: 401k at work, and a savings account at the bank=$3,000.What to do with a $5000 inheritance,
Applying the money in a “lump sum” on the student loan would yield a $125 savings monthly. Instead, using it to reduce the balance on the Mortgage or auto loan would save some of the interest you’d pay and would the shorten the length of the loan but saves $0 dollars monthly. Almost always, a ”lump sum” payment on a debt does little to help your monthly obligation unless that debt can be eliminated. And, even so, as in the example above, by eliminating the student loan and saving $125 monthly, it would take over 3 years to replace that $5,000 spent all at once.
Other good uses of such a gift might be if perhaps you’re shopping for a replacement auto& the gift could buy a better or newer car or make the loan payment more affordable; or, if not currently a homeowner, this gift could be a great start on a required “down payment” to obtain a mortgage. Maybe this could be the time to fund your retirement by opening a Roth Ira or 529 College savings plan for kids or grand-kids.
The best advice I can give is Bank It; at least until you view all possibilities. Parting with $5,000 all at once may not be the prudent thing to do…Money spent is gone…Money saved is there to spend another day.
Cents Maker
PS: Think twice if you believe that a large $ gift can help as “ additional” down payment on a home loan. Mortgaging $5,000 less for 30 years @ 4% will only save $24 monthly. Open a Roth Ira instead (with current rates moderately at 6-8%) and the $5,000 is always available for use.