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Dr. Don Taylor, CFA, Bankrate.com advice columnistSave or spend an inheritance?

Dear Dr. Don,
My husband and I are receiving a small inheritance of approximately $35,000. We have $33,000 in debt (excluding our mortgage) composed of credit card debt, personal loan and home equity line of credit. We are a single-income family at present while I attend college. We are in our late fifties. Should we pay off this debt in full or part, or put it in to savings?
-- Sandra Stash

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Dear Sandra,
I'm always at a loss for words when I hear about someone getting an inheritance because I recognize that an inheritance usually comes at a steep price, the loss of a loved one. If that's your situation, I'm sorry for your loss.

Take a look at the big picture while deciding what to do with this inheritance. In your late fifties, you should have an eye on retirement. You haven't mentioned your retirement savings at all. Paying down the debt gets you back to even, but if you're not going to use the newfound slack in your monthly spending plan (I don't like to call it a budget) for savings and investment, it makes more sense to invest the inheritance and keep plugging away at paying down your outstanding loans from that one paycheck.

You've been given a gift. From my perspective, I'd rather see it go toward a family goal a little more meaningful than paying the freight for your past spending. That said, I really don't know what financial goals your current debt load helped your family finance. It's possible that you used the home equity loan to finance your college tuition. Paying it off with the inheritance certainly fits my idea of having the inheritance help you meet a family goal.

So spend a little time reflecting on what's on the horizon for you and whether it makes more sense to use this inheritance to help finance your future or to pay off your past. An important determinant in all this is how much financial discipline you have in balancing current consumption against saving for future life goals. If 12 to 24 months after paying off these bills you're once again this deep in debt, then the inheritance bought you nothing but time and postponed a life lesson that you could, in fact, learn today.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: Aug. 21, 2006
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