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This week my answers are short so I thought I would tackle more than one question. Please remember to send in your questions to the Longmont Leader at [email protected] and I’ll answer a few of them each week.
I just received a large inheritance, what should I do?
Money is just money, whether it comes from an inheritance, a raise at work, or cutting your expenses. Regardless of the source, you always want to put each new dollar to work in the most efficient destination, so fill up each of these buckets in order:
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Pay off any credit card debt, and other “emergency” level loans at rates higher than about 5%
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Max out your employer 401(k) fund or other retirement accounts for the year
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Pay off your car loan if you have one (which will increase your flexibility to sell that car and cross-trade to a better one)
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Make sure you have at least two months of living expenses ($2000-5000) in a checking or easily accessed savings account
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Put the rest into a low-fee index fund to maximize your future wealth
What is a negative interest rate?
While we will probably never see this at the consumer level, a bank paying you to take out a loan, negative interest rates are a policy tool at the extreme end of the spectrum of tools available to the central banks in some countries. In this situation, instead of the usual situation of paying interest, a central bank starts charging interest to individual banks for storing their reserve money there. This creates an incentive for those banks to get even more aggressive about lending out their reserves, which means dropping their lending rates and pushing loans out to more businesses and consumers.
This means more spending all around, which, hopefully, boosts sales at most businesses, which leads to more hiring, which increases confidence for everyone and thus can help to pull a struggling economy out of recession.
But as an individual, this is all just textbook stuff. In practice, if you read about dropping or negative interest rates in your own country, you just need to think about two things:
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Your economy might be slowing, so be careful about not going too far into consumer debt and make sure you have a plan for what you’d do if you lost your job; this is good advice in all times, not just during a slowing economy.
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If you do have any mortgage or student loan debt, these lower rates might be a good opportunity to refinance and save yourself some money.
This column is intended for informational and educational purposes only and should not be construed as professional financial advice for your individual situation. Please consult with a financial professional before making any serious financial decisions.
