Grandma died. I got money. Now what?

Below you will find an email exchange between a woman who just got an inheritance and me. After reading it, would you have suggested the same thing I did?

Dear Pete,

I have been subscribing to your blog posts since December 2011 in an effort to better understand and control my spending and debt situation. We both contribute to the issues equally and have our own defense that we feel trumps the other’s, but that is another email altogether!

My grandmother recently left me about $25,000 (before the government takes a chunk) and I’m not sure the best course of action.

Do we pay off debt, start college funds for our 2 children (ages 8 and 8 months), invest or a blend of these things?

Debbie

Hey Debbie

Sorry to hear about your grandmother. Inheritances are always more bitter than bittersweet.

The answer will be a blend. Answer the following questions, and I will send you the perfect answer.

1. Amount of emergency reserves

2. Amount of debt and types (car, mortgage, credit cards, student loans, etc) be specific

3. Your ages

That is all. Thanks for your email

Pete

1. Emergency fund: $6000

1. Debt
3. Credit cards: approx. $25k (payments =approx. $850 per month )
5. Mortgage: $278k (payment=$2135 per month)
7. Student loan: approx. $8k (min payment=$214 per month)
9. Auto loan: $625 per month (not sure of loan total)

1. Ages
3. Me: 37
5. Him: 35

Ok, I lied. I have 1 more question now.

Were your credit cards a result of "an event" or "uncontrolled spending"?

Kind of both.

• Event #1(April 2010)=wedding (plans were to pay off the $8000 in less than 1 year. However, Event #2 came along 6 months later)

• Event #2 (Oct 2010)=relocated to Memphis, TN. As a trailing spouse, I had no income. We bought too much house (my argument) and had to rely on credit cards for expenses like gas, groceries.

• Uncontrolled spending: My husband is rather impulsive when it comes to things he thinks our house “needs.” These are usually big ticket items like buying hardwood floors ($400) for a fitness room that has no fitness equipment (and we can’t afford the fitness equipment anyway) or lawn equipment. My uncontrolled spending is groceries and clothes for the kids. Not to say they don’t need food and clothes, I just buy more than what is probably needed. I average $150 a week at the local Giant Eagle (I use my discount card, food perks and coupons, too) **Do you offer therapy with your financial advice?

• Event #3 (July 2011): Jason, age 8 months. We didn’t change our medical insurance to have more coverage for labor and delivery. As a result, another $3k went on the card.

• Event #4 (December 2011): New tires, brakes and struts on the mom-mobile. Another $2,500 on the freakin’ card!

Now that I’m working again, my $60k complements Phil’s $80k and I want to get this debt under control! I would love my only debt to include just a house and car payment at some point!

FYI: We do both contribute to our 401k and take advantage of a dependent care account.

After holding money back for taxes, I would pay off credit card debt.

Here's EXACTLY what I would do:

1. Pay off debt with about $22k of inheritance.

1. Use the next 3-4 months to finish the job

1. Save $850/month (former card payment) from July-December into your emergency reserves. That would equal a total emergency fund of $10,250 by the end of 2012.

1. This would make your grandmother proud.