Capital coming; cashing chips conundrum.
September 22, 2017 10:10 AM   Subscribe

About a year ago, I filed a claim for cause contra a company (Let's call them Acme School Bells, for convenience) for compensation of injuries acquired in an accident.

My counselor now tells me that they are willing to settle, giving me a nice windfall in the low 5 figures after expenses and his fees.

Aside from the obvious (I have a couple of grand in cc debt) I would like to pay off the balance of my car, but the interest on that loan is only like 1.4%, so it seems like there might be a better place to put 17g or so. Trouble is, I don't know where.

Ideas, Mefites?

[Yes, this is a joke account, but it is a serious question. Sockpuppeted because of obvious reasons.]
posted by Claude Cooper to Work & Money (5 answers total)
How long do you want to keep the money for? If it's for the short term, you're not going to get enough in a savings account or even a CD to beat the interest rate on your car loan, low as it is. So if you don't have any better prospects, I'd just pay off the car loan. Having extra cash flow every month is nice.

If you want to invest it for retirement, put it into an IRA over the next 2-3 years and use it to buy shares in VTI or another broad-market index fund. This will give you a tax break in the short term since IRA contributions are tax-deferred.

Medium term (5-10 years, like if you plan to buy a house at some point in the future and intend to use this as part of the down payment) I like municipal bond ("muni") funds, since the interest on munis is exempt from Federal income tax and, if you're investing in munis from cities in your own state, exempt from state income tax as well.
posted by kindall at 10:24 AM on September 22, 2017 [1 favorite]

This will give you a tax break in the short term since IRA contributions are tax-deferred.

So long as you are not (a) covered by a retirement plan at work and (b) above a certain income threshold.

But the idea that your options depend on what you plan to use the money for is correct.

(Note that muni funds pay lower interest precisely because they are tax-free. Therefore, you may or may not find their tax-exempt nature beneficial.)
posted by praemunire at 11:09 AM on September 22, 2017

The usual argument about low interest debt is that if you can get an investment return in the medium to long term substantially higher than 1.4%, then you should invest instead of paying it off. But this ignores two things: liquidity and risk tolerance.

Depending on how the car loan payments fit into your monthly cash flow, it may make a large difference to your day-to-day financial security to have them gone. If you end up with 17k in volatile or non-liquid investments (especially retirement investments) instead, your situation is vulnerable to financial shocks. You should consider whether the security of eliminating that debt is more or less valuable than the delta between 1.4% and the average return of the stock market.
posted by allegedly at 12:10 PM on September 22, 2017 [3 favorites]

Stick it in a Vanguard retirement fund if it's a windfall.
posted by DarlingBri at 12:48 PM on September 22, 2017

If you don't have a rainy day fund, then keep the car loan and put the money in a balanced mutual fund account and try to forget about it.

Vanguard offers a couple of low-cost all-in-one fund that gives you a balanced portfolio targeting a specific risk level.

If you prefer the idea of earmarking it for your retirement, Vanguard also offers a simplified selection of retirement funds based on how many years you have until your expected retirement.
posted by metahawk at 10:30 PM on September 22, 2017

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