How can I make a small windfall grow before I pay debts with it?
May 29, 2020 3:04 PM   Subscribe

I've had a decent sum of money come in recently (mid-five figures), but I'm also saddled with considerable (mid-six figure) debt. Obviously, it doesn't get me out of debt, but I can put take a good-size chunk out of the most pressing debt. I don't have to pay it down right away, so can I park the money somewhere for a while and see it grow?

I realize you are not my financial adviser, and of course, this is an unusually unpredictable/volatile time. But given that my debt dwarfs the small windfall I have, and also because I have time to pay it down . . . are there ways I can increase what I have? I'm aware of high-interest savings accounts (not that 2-ish% APY is all that high, and rates are going down), but what about the market? I have some appetite for risk, but not a ton.

It probably makes more sense to just park some of this amount, not all of it. I would be looking at at timeline of 9-12 months before it all has to be used.
posted by CommonSense to Work & Money (23 answers total)
Unless your debt is basically interest-free, no. Especially over such a short period and being unable to tolerate loss of principal in a time of extraordinary volatility, there is nothing you can put it into that can return more than the interest accruing.

If, however, you don't have an emergency fund, I would set a modest amount of money aside for that before using the rest to repay the debt.
posted by praemunire at 3:11 PM on May 29 [42 favorites]

I don't know how your debt is structured (nor is that something you need to disclose here), but if it's in ways that carry differing interest rates, pay off as much of the high-interest debt as you can right now, because (alert: here comes the obvious!) over the time it takes to pay off a debt, high interest is very expensive. Same if any of that debt is currently past due; fees and added interest on late debt payments can be crippling.

praemunire's advice is sound: set aside two (or three) months of that cash in a separate savings account you don't have easy access to (don't get a debit card for it, etc), and pay the "good-size chunk out of the most pressing debt" you mention.
posted by pdb at 3:17 PM on May 29 [6 favorites]

Agreeing with the above.
A) it's doubtful that the interest gained on a 5 figure investment outweighs the interest lost in a 6-figure debt.

B) if you don't have an emergency fund if 3-6 months of expenses, make it. Then just give the money to your debt.

Dave Ramsey's Financial Peace or at least reading over his 8 baby steps would be great.
posted by jander03 at 3:22 PM on May 29 [6 favorites]

Unless the interest rate on your debt is lower than the interest rate you could get from an investment… you’re better off paying down whatever chunk of the debt you can, highest-interest-rate debt first. You’ll lose more in debt interest than you’ll gain in investment interest.

Make sure the payment is applied towards the principal (some loans will try to apply an extra payment as “prepaying your standard monthly payments”, i.e. just paying interest ahead of schedule, unless you specifically request it be applied to the principal).
posted by snowmentality at 3:25 PM on May 29 [4 favorites]

Oh and also: please don't forget that there may be tax consequences of having a mid-five-figure sum of money come your way. Plan to set aside some of the money to account for that.
posted by pdb at 3:27 PM on May 29 [5 favorites]

Unless your debt is basically interest-free, no.

Yes, this part is pretty key. There's a vanishingly small chance that you will find an investment vehicle with a higher (guaranteed) payoff than the interest on your debt. If you have like a 6+ month period where your debt is completely free of interest, then maybe you could take out a CD or something that matures just before the interest-free period ends and then make the debt payment out of that.

But even then, the same priority applies:

1. Establish an emergency fund
2. Pay off your highest-interest debt

(There's another strategy that involves paying off the smallest chunks of debt in full before touching other debt, but that'd intended as a psychological aid for people who find themselves totally hopeless about the amount of debt they have, which doesn't sound like your situation.)

The two caveats that snowmentality and pdb give are important to consider as well. You'll have to pay tax, so set aside some money for tax payments (it may be worth hiring an accountant to help you figure out exactly how much). Then set up your emergency fund. Then pay off your debt, ensuring that your payments are going toward the principal.
posted by tobascodagama at 3:30 PM on May 29

You'll have to pay tax

If OP is in the U.S., not if it was a bequest or gift (except under very unusual circumstances).
posted by praemunire at 3:32 PM on May 29 [2 favorites]

what about the market? I have some appetite for risk, but not a ton.

Then you should not be anywhere near the market right now. There is not only COVID to deal with but also an election coming up.

In times like these individual investors might as well be donors.
posted by Tell Me No Lies at 3:40 PM on May 29 [4 favorites]

so can I park the money somewhere for a while and see it grow?

Not really, not with these numbers, no.

Basically a savings account can net you maaaaaybe 1-2% (if you have more, you may be able to get more) and even CDs aren't doing much better than that, especially in the short term.

However if some of your debt is credit card debt at high interest, paying down some or all of that debt gets you a good "return" because you're no longer paying against money that is accumulating interest faster than you are paying off. In most cases paying the minimum balance on credit cards is doing this.

So! If you have a mortgage, yeah just keep paying that down like usual. If you have student loans, see if you can pay some of those down early (you may not be able to). Make sure you have an emergency fund.

If you had 50K to set aside for ten years, it still wouldn't be a better deal than paying down high interest CC debt, but it might (depending on the market and things are bleak right now) be better investing it than paying down very low interest debt. Make sure you know what the tax implications are, if there are any, and good luck.
posted by jessamyn at 4:06 PM on May 29 [1 favorite]

Especially right now, any growth opportunities would involve very real risks. I would pay down credit card and other high interest debt, and hold back a bit for emergencies, of which there are many these days.
posted by theora55 at 4:14 PM on May 29

Sometimes you can take advantage of promotional offers where you can make a few hundred dollars by opening a new bank account and maintaining a large minimum balance for six months or so. Read terms and conditions carefully! Chase does this frequently (example), or you could try calling a few banks / visiting websites to see what's on offer. The effort involved could rapidly make it not worth it, though.

Everyone else is spot-on with the emergency fund + pay highest interest debts plan.
posted by momus_window at 4:39 PM on May 29 [2 favorites]

In the context of credit reports, is it true that making payments is better for your score than cashing it out if you could? If someone can confirm that, I would use it to make 1.5x/2x payments instead of just dropping a chunk on the account. The cost here would be that you're not reducing the impact of interest as much as a lump payment, but it may be worth it for your credit.
posted by Evilspork at 5:06 PM on May 29 [1 favorite]

praemunire's advice is sound.

Here's a bit more detail about why investing money in the stock market for short periods of time is a very risky idea:

On average, for money invested in the stock market today for periods of 10 or more years, investors might expect to be able to get a 6% annual return on investment -- before subtracting inflation of 2% or so. A 4% annual return does not sound amazing, but it is a lot higher than 2% interest from a term deposit -- which amounts to roughly a 0% real return after subtracting expected inflation of 2%. But that 6% annual return is not guaranteed for any given year -- or any given week, as we've seen in the last few months -- stock market prices can fluctuate up or down by a considerable amount.

No investor has any control over what price the market may offer to buy their stock at any given point in time, therefore you want to avoid putting yourself in a position where you have invested money in the stock market, but are forced to sell your stock at a low price -- taking a loss on your original investment -- because you need the cash right now, due to unexpected expenses, expected expenses (e.g. down payment on house in a few years time) or other cash flow problems. Maybe stock market prices will finish up down -30% this year but up +50% next year -- averaged over 2 years that gives an annual return before inflation of 5% per year -- [ (1 - 0.30) * (1 + 0.50) = 1.05 aka +5% ] -- but if you were forced to cash out your stocks at the end of this year even though the prices had crashed, you would end up with a return of -30% on your invested cash.

The stock market is a great place to invest money, as long as you don't need to see that money again at any particular time. You want to be in the position that if market prices crash and then take 10 years to recover, you can simply hold on to the stock and defer selling it until the market is offering you a good deal again.

(People who have more financial security are able to take better advantage of riskier investments that offer higher returns, as due to their circumstances they are not impacted much by the associated risks from those investments, compared to people who are less financially secure -- and another structural example of how the rich can get richer. -- no moral high ground here, I invest as much as I can in the stock market towards retirement. )
posted by are-coral-made at 5:12 PM on May 29 [2 favorites]

If you are in the US and any part of your debt is from student loans, factor in the loan(s) interest rate(s), the lender, and the current crisis: The U.S. Department of Education already has said that due to the public health crisis, federal student loan borrowers don’t need to make payments on their loans until at least October. And during that time, no interest will accrue. ("Big Changes Could Be Coming For Student Loan Borrowers", CNBC, May 22, 2020). Key Points: Student loan borrowers might not have to resume their payments for another year. Meanwhile, debt forgiveness proposals are mounting.

Prioritize an emergency fund and then high-interest debt (which is usually credit card balances, not student loans).
posted by Iris Gambol at 5:23 PM on May 29

I wouldn’t recommend jumping into the market without a ton of research first (or at all depending on your risk aversion) but if you’re inclined to look into that direction check out a few investing forums (reputable ones like bogleheads, not like the gambling day trader forums like those populated by teens gambling their student loans). You’ll get more focused and specific advice that you’re never going to see on metafilter.
posted by shaademaan at 6:26 PM on May 29

In case one more vote makes a difference, paying down high interest debt and building even a small emergency fund are your winning choices. Now, if all your debt is at some crazy low interest rate (like current mortgage rate-low), then maybe you might want to look at other options. But anything higher than that and you are going to do better paying it off.
posted by Dip Flash at 8:12 PM on May 29

Emergency fund
Pay highest interest debts
Make sure to pay your debts as a lump sum payment towards the principal, not just as minimum payments. Call your bank or lender to make sure you’re paying it off in this way. You want to knock down the amount that’s generating the interest.
posted by pseudostrabismus at 10:26 AM on May 30

OK, it seems the overwhelming consensus is that paying down high-interest debt is the much smarter way to go, long term. While a good part of my debt has zero interest (family/friend loans), a considerable amount is CRAZY high rate credit card debt.

I'm beginning to see that this was probably a silly thing for me to ask. :-) Thanks all!
posted by CommonSense at 10:32 AM on May 30

By the way, I was very smug about my $30,000 emergency fund right up until we had a family medical emergency and we had to pay up front and battle it out with the insurance companies later. Insurance finally ponied up but it was a lot closer than I would have liked.
posted by Tell Me No Lies at 10:36 AM on May 30 [2 favorites]

If you get a windfall and do not pay back your family and friends ASAP, you're risking those relationships going sour very quickly. Just think, wouldn't your family and friends want to get their money back sooner rather than later, especially in these times?
posted by gakiko at 12:57 PM on May 30 [1 favorite]

Please don't feel silly, it's not a dumb question for a person who doesn't have investment experience. We are all subject to a barrage of financial advice, some of it terrible. not mine, of course.
posted by theora55 at 7:59 PM on May 30 [1 favorite]

Definitely pay your family/friends sooner rather than later even if it is the interest-free debt. You hadn't mentioned that in your initial post so we weren't advising with that knowledge in mind.
posted by acidnova at 8:08 PM on May 30 [1 favorite]

spitball: I was going to write out a longer reply, but short version: The situation isn't nearly as dire as what you're assuming. CC debt isn't nearly as big a portion of that; the vast bulk of it is zero-interest family/friend loans with "pay what you can, when you can" terms. However, gakiko rightly points out that screwing up those relationships isn't really something I want to do.

The high amount of debt is due to the failure of my small business. Businesses can rack up debts way faster and bigger than any mere mortal, and if they fail, it's some heavy shit. Only a small portion of it was secured solely by the LLC (mainly small things like utility bills, etc.), so filing bankruptcy isn't really worth it there — especially when it's far cheaper and easier to just dissolve the LLC. Most other stuff had personal guarantees — some guaranteed by me (back when my credit was good), and others by my parents(!).

Look, if you could do something stupid running a business, I've done it. That isn't really what this question was about, and . . . now I'm being reminded of my depression, so let's just end it here.

Anyway, thanks for the replies, all. I'll give most of this to the family/friends I owe, and cut some high-interest CC debt in half (at least). Then, on the latter, I know from precedent that I can call Chase up and ask them for a payment plan. I know they'll cut the rate down to 2% in exchange for closing the account, and 2% isn't too terrible. It sure as hell is a lot better than anything I'd ever get with my 480-520ish credit score.
posted by CommonSense at 8:13 PM on May 30 [3 favorites]

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