I’ll inherit $40,000 from my grandmother. Should my husband and I boost our kids’ college savings accounts, or pay off credit cards and student loans?

After a terrible battle with dementia, my grandmother died a few weeks ago. She did not leave much, but I will — along with my siblings — receive about $40,000 in life insurance. I am trying to figure out how to best handle it. 

I have some credit-card debt that was incurred during a period of unemployment during the pandemic. My spouse and I have student-loan debt. His debt will be paid off within the next year, while mine still has quite a few years left. 

We have two middle-school children. We have college accounts for them, but they are not nearly enough. We have pretty well-funded retirement accounts for both of us. We have a mortgage that probably has about 15 years left. 

We also have a very old house that really needs some work. We have not really looked into investments but are open to them. So we are trying to figure out what to do with this money.

We are almost positive it is smart to pay off our credit-card debt in full. But we will still have almost $30,000 left to work with after we do so. We would like to work on the house, but is that the smartest financial move? 

Should we put more into the college accounts or try to pay off the student loans instead?

Thank you.

Granddaughter, Wife, Mother

Dear GWM,

Your instincts are correct. All of the above.

Pay off the highest-cost debt first. With variable credit-card rates hitting 19.9%, anyone who is not paying off their credit card in full every month is bleeding money. You are opening your wallet and letting your hard-earned dollars blow in the wind — an ill wind.

After paying off your credit cards, $30,000 is a gift, and a large amount of money for millions of Americans. That said, it will only go so far, so you will have to prioritize your spending and investing. You don’t have to make any hasty decisions.

You don’t say how much you owe in student loans, and what interest rate you are paying, and how much you earn, so it’s difficult to give you a definitive answer. Federal student loan rates could vary between 4.99% and 7.54%.

But private student loans can run far higher than that. If you enlist the help of a financial adviser, you should be able to make a call on whether it’s a good plan to continue to pay your student loans off every month, or knock it on the head.

“Paying off student-loan debt in a lump sum isn’t always financially prudent, especially if it will strain your financial well-being,” Experian says. “If doing so will require you to deplete your emergency fund, you could be putting yourself in a vulnerable situation.”

Continue to fully fund your retirement accounts, and make sure you have an emergency fund of at least six months of expenses — ideally, 12 months — and keep tracking your monthly expenditures to ensure you don’t rack up credit-card debt again.

“Working with your employer to secure an employer match for your 401(k) or adding any additional tax-deferred options will help your savings add up faster,” says Jacqui Kearns, chief wellbeing officer at Affinity Federal Credit Union in New Jersey. “Make sure to discuss your investment options as well to ensure you are balanced, and feel you are seeking a financial consultant to help you weigh what works best.”

It’s great that you own your own home. Kearns cites the 2022 Department of Housing and Urban Development’s report, which states that American households should spend an average of no more than 30% on housing costs, including rent or mortgage payments, utilities, and other fees.

You don’t say what age you are or how much equity you have or your interest rate, but let’s hope you are locked in at a low interest rate, or refinanced at a low interest rate. With inflation hovering at 6.4% in January, you should put your money elsewhere.

Consider putting some cash in a certificate of deposit, a savings account with both a fixed term — typically from three months to five years — and a fixed interest rate. Some online accounts have interest rates of up to 4.4%. 

Take a lesson from this couple who live frugally, and put approximately 20% of their income into college savings plans for their kids. “People here in the suburbs see us as poor,” they wrote. But they will have a comfortable retirement. 

House renovations are important. Even relatively minor renovations can save you from spending tens of thousands of dollars on, say, a new roof or dealing with dry rot 10 years from now. Homes, like people, require regular tune-ups. 

As an aside, inheritance is not counted as community property, so while you are budgeting as a family, you are also free to have the last word on how to spend or invest this money, should you reach an impasse with your husband.

I’m sorry your grandmother had such a difficult final few years, but I am glad she is at peace, and I’m sure she would be very happy to know that her life-insurance policy is helping her grandchildren after she’s gone. Good luck with all your plans.

Yocan email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.

Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

The Moneyist regrets he cannot reply to questions individually.

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