How to best apply $35,000 inheritance?

[seekinggodjesus]

I posted this earlier but left out some details so here’s everything I can think of that’s pertinent. I’m getting an inheritance of $35,000 within the next month. I’m active duty military and have certain benefits regarding credit cards and their APRs so the debts I currently have are very low. All are sub 4% and are fixed rates. Not including my mortgage (30 year, 2.5%), here are my debts:

• Capital One CC: $7,000 @ 4%
• Wells Fargo CC: $8,000 @ 0% until April 2025
• Car Loan: $8,000 @ 3.14%, payment is $340

*Originally $15,000 for 48 months so it’s halfway paid through with my payment being $340 monthly. New car originally and has 55k miles. Plan on keeping until it dies.

• Private Student Loan: $90,000 @ 3.2%, payment is $585

*Originally $100,000 for 20 years. Picked that term to have a more manageable monthly payment for now but plan on making massive payments once my CC’s are paid off.

Credit score: 633 (due to large balances on cards)

Total Income: $5900
Total Expenses: $4800

I have a very strict budget and put as much of my disposable income every month towards paying down my debts. Currently paying minimums on everything and putting everything I have towards the Capital One card. I’m aware of how I got in this situation and will not under any circumstances repeat those mistakes. Once my debt is gone, it will stay gone.

My options as I see them:

Option A: Invest it all in a HYSA or other investment.

Option B: Pay off the interest bearing card (Capital One).

Option C: Pay off both cards.

Option D: Pay off both cards and car.

Option E: Pay off both cards, car, and put the rest towards the student loan.

Option F: Put it all towards the student loan.

Option G: Some other combination of the other options.

What’s the best option here? Mathwise all my APRs are lower than any investment product right now but the downside is my credit score will remain low and I will feel no immediate monthly relief. If I ever need to credit, this will present a problem. I do plan on (if possible) moving to a different state within the next 2 years. On the other hand if pay some things off it frees up money to put towards other debts and lowers my monthly expenses, my score goes up significantly, I get the psychological boost of less payments, but then I miss out on investment income. Any guidance would be much appreciated.

TLDR: Pay off low interest debts or invest?

Edit: I have no savings currently.

 

[londonleah]

@seekinggodjesus You don’t mention your savings but I’d apply $1000 to a HYSA for a starter emergency fund. Then pay off both cards and the car payment. Then take the remaining $11,000 and apply to the principle on your student loan. From there continue to take all the money you applied monthly to your two cards and car payment and apply that to your student loan in addition to the $586 monthly and you’ll be debt free in a few years instead of 20. Jas also personally apply that remaining $1100 from your leftover after expenses to the student loan as well. You’ll unlock so much savings potential after you can get rid of those debts, especially the two higher monthly cost ones(almost $1000 monthly between the car and student loan). Be aggressive now and it’ll pay off in the long run. Based off your details here you’ll have over $2,000 monthly leftover to save if you’re debt free.

 

[leah13]

@londonleah I like this plan. If I may, due to the high cost of living we are all experiencing, I would suggest that OPs “starter emergency fund” be $5,000 (roughly 1 month of expenses) to be able to cover their deductibles in case SHTF. $5K still isn’t much but it will lessen any blow that life may throw their way. Other than this, I would follow this plan to a T. Once all debts are gone, build your emergency fund to be able to cover 6 months’ worth of expenses and start thinking about saving for retirement!

 

[godswill1]

@seekinggodjesus Use is as your emergency fund and leave it.

 

[autumn22]

@seekinggodjesus Does your private student loan allow for directing extra funds towards principle? Some have only used extra funds to make additional payments (leading to no cost savings over time).

My initial thought would be to pay off both credit cards (even if the one has 0% interest) and the car loan. Then roll what you would have been paying to those into larger monthly payments on the student loan.

The unused portion of the inheritance I would put into a HYSA so that you have funds built up for that potential move since you're looking at that happening in the next couple of years.

Like someone else mentioned, I didn't see mention of an emergency fund so setting some aside for the move could double as an emergency fund until you're ready for the move.