Ask Stacy: What To Do With a Windfall?

Q. My husband and I have just inherited about $12,000 from a relative who passed, and we don’t know what to do with the money. Should we pay off the $4,000 in credit card debt we have? Pay down the mortgage? Invest the money in the stock market? Or just keep it in a savings account for a rainy day? I never thought having a windfall could be so stressful. Sarah in Georgia

This is the kind of stress everyone should have, Sarah! Seriously, though, when you consider the options, the decisions are fairly easy…

1. Get rid of that credit card debt! This is an absolute no-brainer. If you have a typical credit card, the interest rate you’re paying is probably around 15 percent. Paying it off is like earning 15 percent, tax-free with no-risk – something virtually impossible to do. So paying off that $4,000 is definitely priority one. Here’s a news story I did comparing paying off debt to investing: Investing vs Paying Credit Card Debt.

2. Save for a rainy day. If you don’t have an emergency fund already, sock away enough to cover at least six months of your living expenses. Keep it safe in a savings account or a money market account: you’re not going to get much in the way of interest, but be sure and shop your rates to make sure you’re earning as much as possible.

3. Invest in the stock market. If you have your emergency fund covered and can afford to tuck this money away for at least five years, you might want to consider the stock market. The stock market requires more knowledge than other types of investments, and you have to be able to deal with the risk, but it’s also the potentially most rewarding. And I think your timing could be good – see this recent article explaining why I think stocks may do well over the next couple of years: Why You Should Buy Stocks and Houses Now. If you’d like to see the stocks I own personally, check out my portfolio.

4. Pay down your mortgage. Mortgage debt isn’t as bad as many other kinds, because interest rates are typically lower and the interest you pay may be tax deductible. That’s why although I hate virtually all debt, I do have a small mortgage. That being said, having a debt-free home is one of life’s most rewarding accomplishments. And paying extra on your mortgage is a great way to get there – I explain it in this video about deciding whether to pay down your mortgage or invest: Paying Down Mortgage vs Investing.

Q. I got a tax extension, and now my taxes are due Oct.15. But I’m still not done. Should I keep trying to do it myself? If I hire someone else and they screw it up, does the IRS go after them for me? Does the IRS have a list of approved tax preparers? I’m freaking out because I don’t want to get audited. What should I do, Stacy? Andrew in California

First, take a deep breath. It’s going to be OK – and Oct 15th is still a long way away.

Let’s start at the end: If you made less than $200,000 last year, your odds getting audited are only about 1 percent. There are certain triggers for an audit, and I discuss them in Odds of an IRS Audit. But the bottom line is: If you’re a typical taxpayer and you report your income and expenses properly, you probably won’t get audited – and even if you do, you probably won’t get in trouble.

As for who does your taxes, the IRS doesn’t care and doesn’t make recommendations. If you have a lot of complicated deductions, it might make sense to go to a pro, or at least use tax software. Check out this story about using software vs. a pro Tax Pros: Getting What You Pay For. But here’s a quote regarding responsibility from the horse’s mouth:

“Whether you select a professional or do it yourself, you are ultimately responsible for what’s on the return,” says Mike Dobinski from the IRS. He says the most common mistakes are simple things like leaving off your Social Security number. But others include not grasping concepts like the earned income tax credit. Check out The 7 Most Common Tax Mistakes.

Finally, if you make under $49,000, you might qualify for free help with your taxes. And if you do decide to go with a pro, here’s my advice for finding the right one.

Follow all this advice, Andrew, and your tax stress will disappear – until next year!

Stacy answers readers’ questions every Friday. Want him to answers yours? Submit them here.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
9 Purchases That Will Make You More Productive
9 Purchases That Will Make You More Productive

These Amazon products can give you an extra edge at work and other parts of your life.

15 Great Amazon Finds You Can Buy for Less Than $5
15 Great Amazon Finds You Can Buy for Less Than $5

These products offer big value at a small price.

Why Is My Pension Killing My Social Security Benefit?
Why Is My Pension Killing My Social Security Benefit?

A reader says the government is penalizing him for having a pension. Is he right?

5 Common Medical Expenses That Medicare Won’t Pay For
5 Common Medical Expenses That Medicare Won’t Pay For

Don’t let these health care costs catch you off guard in retirement.

Don’t Pay for These 10 Things: They Are Free With a Library Card
Don’t Pay for These 10 Things: They Are Free With a Library Card

Before you spend another dollar on items and services like these, check with your public library.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

Am I Eligible for My Mother’s Social Security Benefit?
Am I Eligible for My Mother’s Social Security Benefit?

Can an adult daughter tap into her late mother’s benefit?

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

These Major Appliances Got the Worst Reviews in 2020
These Major Appliances Got the Worst Reviews in 2020

Consumer Reports says these home products got the worst ratings from experts.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have all of these documents that are crucial to their golden years — especially during a pandemic.

Is This Treatable Condition Causing Your High Blood Pressure?
Is This Treatable Condition Causing Your High Blood Pressure?

Researchers say too many doctors are overlooking this potential source of hypertension.

11 Generic Products You Should Buy at Costco
11 Generic Products You Should Buy at Costco

Not all generics are worthwhile, but these are among the best from Costco’s Kirkland Signature brand.

3 Cable TV Companies Hiking Prices for 2021
3 Cable TV Companies Hiking Prices for 2021

Still married to your cable company? Hold on to your wallet!

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

8 Tips for Retiring Comfortably on Social Security Alone
8 Tips for Retiring Comfortably on Social Security Alone

It’s never too early to start learning how to live well while living on less.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

9 Small Expenses That Are Bleeding Your Budget Dry
9 Small Expenses That Are Bleeding Your Budget Dry

Keep more of future paychecks by eliminating these budget-busting unnecessary expenses.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.