Advice on Allocating Inheritance

Step 1: Prioritize Housing Needs

  1. Assess New Housing Costs: If you're considering moving, research what kind of home you’d like to purchase and what your monthly housing budget would be. Keep in mind:

    • Maintaining affordability is key. A good rule of thumb is to keep your total housing expenses (mortgage, taxes, insurance) below 30% of your gross monthly income.
    • With your current $1,184 mortgage payment, you’ve been saving significantly. Increasing housing costs can affect your long-term flexibility.

  2. Leverage Your Equity and Low Rate:

    • You have a low 2.25% mortgage rate on your current home. Selling it for a larger home means taking on a much higher interest rate (6-7% in today's market), significantly increasing payments.
    • Consider keeping the current house as a rental property if it’s feasible to rent it out for more than the mortgage payment.

  3. Down Payment Recommendation: Allocate $150k-$175k for a down payment on a new home. This gives you the flexibility to buy a larger home while keeping your monthly payments reasonable, especially with today's higher rates. The larger the down payment, the smaller the loan and the more manageable your monthly costs.

Step 2: Plan for College Savings

  1. Understand College Costs:

    • The average cost of in-state tuition is around $10k/year for tuition alone, rising to $20k-$25k/year with living expenses.
    • With your 25% state tuition discount, costs could drop to $15k/year or lower, making total expenses for a 4-year degree roughly $60k-$70k.
    • If your son receives scholarships, these costs could drop further.

  2. Evaluate Current Savings:

    • You already have $6k in a college savings account. Assuming an 8% annual growth rate and regular contributions of $250/month for 6 years, the account could grow to ~$30k by the time he’s ready for college.

  3. Suggested Allocation: Allocate $25k-$50k of the inheritance to his college savings, depending on:

    • How much additional money you can contribute monthly until he graduates.
    • Whether you expect scholarships or grants.

Consider using a 529 plan for tax-free growth if you’re confident the funds will be used for education.

Step 3: Keep a Cash Reserve

It’s always wise to keep some liquid cash for emergencies or unexpected costs related to moving, renovations, or other priorities.

Sample Allocation Plan

Here’s an example breakdown based on the above considerations:

  1. $150k for a down payment on a new home (or less, depending on the price).

  2. $30k in a 529 plan for college savings.

  3. $20k as a cash reserve for emergencies or flexibility.

Additional Considerations

  1. Balance Lifestyle and Savings: Moving to a larger home may improve your quality of life, but don’t stretch too far and sacrifice your ability to save or enjoy your income.

  2. Loan-Free College Option: If ensuring your son graduates debt-free is a priority, you could direct more funds toward his 529 plan or keep a portion in a brokerage account for flexible use.

  3. Investment Opportunity: If you’re uncertain about buying a home in the current high-interest environment, consider investing some of the inheritance in a balanced portfolio. This could allow the money to grow while you wait for more favorable housing conditions.

Final Thought

Your instinct to balance a home upgrade with saving for college is solid. Focus on maintaining financial flexibility, avoiding overextending on housing, and ensuring your son has enough to pursue his education without loans. This thoughtful approach will set you up for long-term financial health and peace of mind!