What to do with a small inheritance

Question

My wife and I inherited $10,000, but we are not sure how to best use it. We owe $92,000 on our home equity line of credit at 3.5% and we have another $25,000 on a credit line at 6.5%. We have about $6,300 in RESPs for our three kids and $29,000 in RRSPs. We’ve thought about replacing our 10-year-old vehicle, but we worry we’d be throwing the money away if we did. Neither one of us has much knowledge on how to invest. Having your insight would be great.

Answer

I am relieved to hear that a trip to Las Vegas is not on your short list of options for your sudden windfall. While it would be really fun to walk the Strip and play the slots, I think you are right to consider more conservative options. Alas, there isn’t a simple answer to your question, but here are some of your options.

A car is an expense not an investment

Unless your car is at death’s door, I would strike this option off your list right now. A car declines in value the second you drive it off the lot, so while it would be nice to have something newer, more fuel efficient and more comfortable, I would focus on options that have a positive rate of return instead of a negative one.

Paying off debt provides a guaranteed return

You mentioned that neither of you have much knowledge about investing. That is fine, because you can get a guaranteed return by paying down a part of your line of credit rather than roll the dice on the stock market. While stocks have the potential to earn healthy returns, they come with risks. On the other hand, you can get a return of 6.5% by putting your inheritance towards the $25,000 on your line of credit, with no risk at all.

RESP contributions earn a 20% government grant

You might also want to consider putting at least a portion of the money into your kids’ RESPs. As you likely know the government provides a grant of 20% of the value of your contribution, up to $500 per child per year. Now that is a rate of return worth celebrating.

Use this opportunity to revisit your cash flow

Whatever you decide, take this opportunity to look closely at your cash flow. Look for ways to use your inheritance to increase your income or cut your expenses to help you gain momentum on creating a healthier financial future for your family. If you can find a little bit of extra cash every month, here are a few ideas I’d focus on:

• Try you increase the amount you contribute to your retirement savings. The more you put in, the more tax you defer and that will give you a higher tax refund, which you can then use towards debt repayment. I don’t know how old you are, or whether you have a pension coming to you, but if you’re like most Canadians increasing your RRSP should be a priority.

• You are going to need a newer car down the line, so you might consider opening a TFSA and setting up an automatic withdrawal so you have some money stashed away so you don’t have to borrow it when the time comes.

Honour the inheritance by identifying the benefit you received.

One final thought as you make your decision about where to put your inheritance: Take the time to identify the benefit that it afforded your family, to honour the legacy of the person it came from. It won’t affect the financial rate of return of course, but naming the benefit will magnify the value of what you have received.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.