What to do with a modest inheritance...?

galileangoatee

Hi,

Long post alert! But the reason for this is that I see a lot of new people getting slated for not providing enough info or not having done enough research, so I wanted to ensure that I'm giving enough context to justify this new posting!

Apologies if this is a question that has been asked a lot, but I've had a read through of some of the other posts on this forum and nothing seems to really reflect my particular situation, so I hoped you might be able to help me!

My grandfather died earlier this year and I am due to inherit a sum of money. I'm not sure what the total amount will be, but it will be around £50k after taxes have been paid (the total inheritance is being split between a number of beneficiaries, so my share may be more than this as it depends on the sale of the house etc.).

I have existing debts as follows:
* ~£20,000 student loan
* ~£3,000 remaining of a £8,000 car loan that I pay off in monthly instalments (I'm due to finish paying this off by mid-2015, but the interest portion of it is quite low at the moment as I've already paid off most of the interest. The last statement I got from them said I would save around £120 if I paid it off early!)
* ~£700 remaining of a £1,000 credit card debt (it's interest free for another 6 months, and I've only had it for 2 months so already paid off £300 - I only got it to buy a couple of expensive purchases online to give me the additional protection, so paying it off in time should be achievable)
* ~£1000 overdraft (this is the max on my overdraft and the amount I'm using at any given time fluctuates a bit depending on monthly bills, but I'm reducing it by approximately £80 a month)
* money owed to family, around £3,000 (interest free!)
Total: ~£28,000
(~£8k without student loan)

Clearly I will be putting a chunk of the money towards paying off these outstanding debts, which will then enable me to start saving the extra cash I'll then have left over each month (this is an exciting prospect as it's the first time in my life I'll be able to do so). However the one debt I'm not sure about is the student loan as the interest rate is currently really low (last statement I got said it was 1.5%), and I reckon I could put the money to better use by investing it rather than using half of it to pay this off, as this will give me around £45-50k to play with.

I'm not very impressed by the interest rates offered by most current & savings accounts, however the Santander 1,2,3 looks most promising as I could get 3% interest on a balance of £25k. If I got two accounts and put all the money in them, I could potentially earning a tidy £1,800 a year (before tax).

But I'm wondering if this really is the best use of the money. I've considered investing in property, but the situation is complicated. I currently rent (~£700pcm) but housing where I live is simply unaffordable, and even with a mortgage of £130,000 + putting the £50,000 forward as a deposit, I'd not be able to afford anywhere half decent, let alone large enough to hold all my stuff. I've considered buying property elsewhere in the country and letting it out, as this would allow me to get more property for my money and whilst occupied would give me an extra (taxed) income as well as hopefully a return on my investment when I come to sell it. But I'm slightly nervous about becoming a landlord, especially if I'm still renting myself.

Shares-wise, I have some shares I received through work as part of my remuneration package, however I don't intend to sell them for a while as I'm hoping they will increase in value, so I consider these to be more an investment towards my future (perhaps a pension nest egg). I haven't given much consideration to buying more shares (either my company's or other shares), simply because I don't feel I know enough about it and I'm aware it can be high risk.

In terms of work & pension, I currently have a pension through work that is getting around 10% of my salary every month (split between myself and employer). I can make additional contributions if I like, but I'm fairly happy with this level for now as I'm getting good money for my age and job, and the interest rates are currently quite low.

Hmm, other relevant info... I have no assets really to speak of, and no savings. I'm 26 and live alone, though I have a longterm partner who lives elsewhere (I moved for work). Although we are a couple, we are financially quite separate, which is fine with me - I would prefer to keep it that way for now as I would like to be able to be financially secure myself before considering sharing assets with another person (he earns about 50% more than me and already has a mortgage, but then he is 9 years older). I've only just in the last year had a good job and started getting a decent salary, hence why I have no savings and a few debts, but in the year I've had a higher salary I've been able to reduce my debts substantially (they were nearly £40k when I first graduated! and most had fairly high interest rates) and I'm really pleased that I've also been able to start paying a chunk of money into a private pension each month.

So my question is - based on all of the above, what should I do with my inheritance once I've paid off some of the debts? And what should I do with the extra income I'll be able to save/invest each month? I'm looking for a fairly low risk strategy but one that will give me good growth potential. I'm not too concerned about getting an instant return as I'm coping OK without the extra money (though it would be a nice extra). I'm treating the inheritance as a really generous gift and a bonus to my financial plans, and I'd most like to make the money work for me to hopefully give me a comfortable future when I'm older. (Early retirement is a nice dream too!) Additionally, since it was such a generous gift from my grandfather, who was very careful with money and made it work for him all his life, I feel that I ought to invest it in a way that will give me a really good long-term return. I don't mind putting time and effort into a strategy that will grow the inheritance - such as switching bank accounts - but it's knowing which strategy is best for me, and that's where my youth and inexperience lets me down!

Thank you so much for reading. I'm looking forward to reading your comments and suggestions!

SAHD_Jim

Purely my opinion obviously, but I wouldn't contemplate any form of investment until I'd paid off ALL, not some of the outstanding debt. Morally, the family debt would be high on my list to be redeemed.

If it were me, I'd pay off the 28K, sink the max (£11,520) into an investment ISA, and then have the rest in something like the 123 current account, with your monthly surplus building this also. Then in the new tax year you can max the investment ISA again (either in lump sum or monthly) and then rinse and repeat making sure you always have easy access to a decent emergency fund.

As for an Investment ISA you can manage the risk by investing in funds rather than directly in shares. The funds don't even have to be totally share based either, they can be all sorts of asset classes and have all sorts of risk profiles.

Archi_Bald

Just a quick comment since I am in a rush

galileangoatee wrote: »

Santander 1,2,3 looks most promising as I could get 3% interest on a balance of £25k

3% of £25,000 = £750. Minus £24 annual charge each account leaves you with £702 before tax.

darrensurrey

Unless you're an investment genius, then number 1 priority would be to pay off your debt.

Of course, you could just put it all on Man U to win on Saturday, so you end up with £200k to play with... :rotfl:

Masomnia

Sorry to hear that about your grandfather.

Personally, I'd pay off the debt, car loans and credit cards to save on the interest. I'm assuming you'll save more in interest than you'd earn with it in a savings account.

I wouldn't pay off the student loan. At 1.5% you'll do better with savings accounts, and if you need the cash you'll have it to hand., plus it gets written off after 25 years etc etc. You know all that. I think you're thinking on the right lines there.

Since you've got no savings that would be the next priority. The Santander account looks good, also look at Lloyds' Vantage accounts. ISAs.

If you're looking to buy a property in the not too distant then keep it in an accessible account. I wouldn't look at investments in this stage, but certainly think about it for the long term, because of inflation.

Perelandra

I certainly wouldn't pay off the student debt. In addition to the reasons given above, depending on how much you earn over your career some/all of this might not ever need to be repaid- you never know what might happen in the future.

If you're considering buying a house at some point (even if you can't afford one now), then this will go a some/a long way towards that deposit eventually. Even if it's not affordable now, having an £xk headseat will make it affordable that much sooner. If you were to buy a house, when do you think it would be? Depending on how far away that might be, you may want to consider whether saving or investing any of this makes more sense.

I think you may find it hard to get a BTL mortgage until you "own" (albeit mortgaged) a home of your own- I've heard on these boards previously that lenders are nervous doing BTL for someone with no property, but have no personal experience to back that up.

kidmugsy

galileangoatee wrote: »

* ~£20,000 student loan HOLD?

* ~£3,000 remaining of a £8,000 car loan. CLEAR!

* ~£700 remaining of a £1,000 credit card debt (it's interest free for another 6 months, and I've only had it for 2 months so already paid off £300 - I only got it to buy a couple of expensive purchases online to give me the additional protection, so paying it off in time should be achievable). CLEAR in 6 months time!

* ~£1000 overdraft (this is the max on my overdraft and the amount I'm using at any given time fluctuates a bit depending on monthly bills, but I'm reducing it by approximately £80 a month) CLEAR!

* money owed to family, around £3,000 (interest free!) CLEAR! And take your creditor out for dinner too!!!!

Consider putting £11520 into a Castle Trust ISA: 3 years fixed term, pays 2% p.a. above the house price inflation rate as measured by the Halifax index.

Use the Santander account too.

Just keep saving like billy-oh until your rising savings overtake local house prices (or meet them going the other way).

DigForVictory

Modest is a lovely word - covers a range of possibilities.
As others have said, wipe debt as soon as it costs you (other than the student loan - that was lent to you for you to repay from *earnings*) then keep as much as you can handily invested.
Of course yes ISAs, and after that wherever is safe and you can get at it.

atush

I agree with most, keep the student loan, and pay off the other 8K debt immediately, apart from the 0% card which you set aside the cash to pay that off just before the end of the interest free period.

Then pension. The one thing you didn't say (that I saw) was your age. I'd up it until you are paying in half your age.

Property. Are you in London? Have you thought of moving a bit further out into the outskirts where you could get a one bed flat for your money? Otherwise, i'd save and wait until you have another salary (ie a partner) to buy with.

Savings. you need enough in cash to cover 3 months outgoings, plus any upcoming expenditures you have like car, holiday etc.

Then S&S isas. Keep putting in the full amt each year til you've used up your spare inheritance. This will hopefully grow to fund future life inprovments from Property to marriage, children, retirement.

Dont forget, immediately you pay off all the 8K debt, to set up a DD into a savings acct be it cash isa, regular saver etc that uses up what you used to pay your debts with. If this money goes back into your CA, it will soon be spent. This will be a new cash savings pot to bolster your emergency fund to 6 months spending and higher and to spend on the future so you don't have to dip into the S&S isas.

With the above plan, or something similar, you are on your way to living within your means, and saving for your future.

galileangoatee

Wow! Thank you so much to everyone for your suggestions - I wasn't expecting so many replies, nor so quickly

I've got a much clearer idea of what I should be doing now, and it seems like saving is the best option. I also agree about leaving my student loan for now - whilst the interest rate is low I should be able to get a better return by saving the cash, and I'd like to buy a house in the not-too-distant future so having a headstart on a deposit seems like a sensible idea - thanks to Masomnia and Perelandra for reinforcing this.

@Archi Bald - my bad. My calculation was £60,000 * 0.03 = potential £1800 pa (I figure I'd split between 3 accounts, £20k each). You're right to point out the £24pa fee per account as well.

@kidmugsy - I confess I've not heard of a Castle ISA. I checked out their website earlier, but I'm still not 100% sure I understand how they work - they track the Halifax House Price Index (currently around 6%?) and give you a guaranteed return of 25, 50 or 70% of that on top? Is it reasonably low risk? Any further reading (that's not their FAQs trying to sell it to me!) that you can direct me to would be great! Also, saving until my savings overtake local house prices is a pretty unachievable goal! I'll be in my 70s by then

@atush - Thanks for your detailed reply. I'm 26, I did include that, but I wrote a lot so not surprised you missed it I'm not sure I understand what you mean by 'paying in half your age' - £13k pa? I'd have to be earning £130k a year to make that my 10% contribution! I live near London but will most likely need to move reasonably centrally for work in the not-too-distant future There are a few commuting possibilities - for example, I haven't ruled out moving back to where my partner is based (Cambridgeshire) and either getting somewhere together or getting somewhere there myself (he's settled there and I wouldn't want to force him to move out just because I wanted us to get somewhere together), but I'd rather not have to do a long commute if I can help it. My work is tiring and stressful enough! However living apart is not easy, so it does have some strong pros. Thanks for your two really good suggestions to firstly set aside several months' of outgoings before looking at any other savings, and secondly to set up DDs to funnel spare cash from paying off the debts into savings accounts where I won't be tempted to touch it. Those are really helpful, and I'll definitely do both. I'm also not sure what an S&S ISA is and how this is different from normal ISAs.

Thanks to everyone again - I'm now off to browse through Martin's guide to the best ISAs so I can get a feel for what is available.

It would be great to hear from you if you have any more ideas or comments.

galileangoatee

SAHD_Jim wrote: »

Purely my opinion obviously, but I wouldn't contemplate any form of investment until I'd paid off ALL, not some of the outstanding debt. Morally, the family debt would be high on my list to be redeemed.

Thanks for your suggestion - I understand where you are coming from but the student loan is the only one I'm iffy about, and I'm swayed by the other opinions on here as they are echoing what my gut is telling me.

I definitely agree with you about the family debt from a moral perspective, however from a financial perspective they have reassured me many times that they are able to help out and can afford to do so - it's tremendously kind of them, and I'd like to think I'd do the same if I was in their shoes. Because of this they've asked me to prioritise my other debts first as these are costing me interest whilst theirs is interest-free. I am paying them off bit by bit each month, but I will be using some of my inheritance to settle anything outstanding (and get them a nice little something to say thanks for helping me out!).