What should I do with my $10K windfall, given these options?

Question

Let's say you get a $10k windfall. How do you determine what is the best thing to spend it on?

• We need a new roof.
• Our mortgage is moderately underwater but not in bad shape and we are content where we are.
• We make $550 in monthly car payments--owe about $25000 for 2 cars.
• I have an education loan of about $10k to pay off.
• No credit card debt.
• We are paying what we can to 401k but only about 5% of income (we are in our early 30s)
• We have an emergency fund but it is small at this point.

Part will get spent on something fun. But the rest--new roof? Pay it right to mortgage? Pay off a car? Stock market?

Answer 1

I've been listening to Dave Ramsey a lot lately, and he encourages (encourage might be too light of a word for him) this priority list for budgeting:

1. Make sure you can make minimum payments on all obligations.
2. $1000 emergency fund
3. Extra payments to debt (everything but mortgage) from smallest to largest (in rare conditions, serious bills first, like IRS, no matter the size).
4. Savings — 3-6 months of expenses

I would strongly advise you to tackle this list before you start to think about any sizable "fun" spending. If you don't have #1, set that aside first.

The options you mentioned:

• New roof: You should ask yourself "what is the potential cost of not getting a new roof?" If you can save up for it a little at a time, while putting most of the rest of your money to paying off debt, that's what I would do. Unless, of course, there is damage or risk of damage to your house by not doing it now.

  Then, you need to do the same measurement (of doing the roof now) against the goal of saving three to six months of expenses. Especially in your case, with your mortgage underwater, you want to be sure you are prepared should anything happen (for example, losing a job, and potentially being forced to move for a new job).

• Cars/student loan: (Refer to #3 above — in other words, yes).

• Mortgage: Dave Ramsey typically doesn't advocate extra payments to house until the list above is taken care of, and you are saving more toward retirement and college funds for children.
• Stock market: I would definitely not invest it before your debt is paid off. That would essentially be using your debt as leverage, which is a strategic, risky move. Since you don't seem to have any investing goals in mind, it doesn't sound right for you at this time.
• Fun: Save for last. I would encourage you to budget in some fun to your normal budget (as possible) to stay happy, but certainly wouldn't advise to use a major portion of a windfall for it, while several items on the list are still outstanding.

Answer 2

I think you've got competition on that list for where to put the money - I'd work out which option is costing me the most currently or will cost me the most in the future and take care of it.

I'd be willing to bet that Eric is right, though, that it will need to be the roof. Not fixing it could cost you more in the long run than any of the other items on the list (assuming your circumstances remain roughly the same).

General comments/other considerations:

• Interest on education loan tends to be quite low, so not worth targeting
• Not enough to top up the 401K given everything else you have going on
• I'd ignore the car payments, unless you're getting nailed with a bad interest rate; if that were the case, it might warrant a closer look.

Any money that doesn't get spent on the roof (if any) - I would put in a rainy day fund.

Answer 3

As much as I'd like to tell you to save some for an emergency fund or use it to pay off some debt, if you really need a new roof you should get that taken care of first.

Answer 4

If you need a new roof because your house is full of buckets that fill up every rain :) then that's most likely the item at the top of the list. If you need a new roof because you don't like the color, I'd do something else with it.

If you are in the US and the 'education loan' has the same caveats attached as your average student loan, I would eye that one with intent if the roof can soldier on for a few years as is. The simple reason for this is that a student loan would be the one debt that you list that you can never get rid off unless you actually pay it off, no matter what happens (IOW student loans aren't bankruptable). Disregard this if the caveats in the first sentence don't apply...

Answer 5

I recommend fixing the roof.

You're going to pay for it eventually, either as an emergency repair or a concession at sale.

Answer 6

Have you looked at DIY roof repair? Caulking with tar adhesive, and shingle replacement isn't that hard, if you're in good health. Totally depends on how bad your roof is/what the demands on it are going to be.

If you can squeak another year out of it, with minimal investment, you'll have a year's worth of, say car-debt (at what percent interest?) to put into your roof fund.

Answer 7

Hard to give an answer without knowing more details (interest rates, remaining principle on loans, especially how soon the new roof is needed). Maintaining the value in your home (unless you are planning to walk away from it or short-sell or something) is of paramount importance, and the cost of a leak should it happen can be substantial.

If the roof is a few years out, and you have loans with interest rates about oh I'd say around 6%or more then I would pay off those loans and take the money you were paying there and start putting it into a fund to pay for the roof.

I am also a huge fan of doing whatever you can to max out your 401K contributions. Money put into a 401K early has a LOT more value than money put in later, and since you don't pay taxes on it, the cost out of your pocket is much lower (eg. at a 20% tax rate it costs you only $80 out of pocket to put $100 into your 401.. (look at that, you just made like 25% return on that $80)

Paying off loans is pretty much equivalent to making a risk free return on the money equal to the interest rate on the loan. But to REALLY make that work, what you need to do is in a virtual sense, keep making the loan payment just now pay it to yourself, putting that money into a savings account, or towards your 401K or whatever. If you just torn around and start spending that money, then you are not really getting as much value to paying off the loan early.