Dear Liz: I'm writing to get some help on what to do with $300,000 that I have recently inherited. My husband and I are in our early 50s. We owe $180,000 on our home at 5% interest, with seven years left on our 15-year loan, and have no other debt. We have a combined $225,000 in retirement accounts and about $15,000 in a regular savings account. Does it make sense to pay off or pay down our mortgage with the inheritance or just keep it in savings?
Answer: You need to take a small chunk of that money and invest it in a session or two with a fee-only financial planner who can review your entire situation and give you personalized advice.
In all likelihood, the advice won't be to pay off the mortgage. You're on track to have your home loan paid off before retirement age, and most people have better things to do with their money than pay off a low-rate, often tax-deductible debt.
It doesn't make much sense to let your inheritance languish in a savings account, however, when you're likely to need more money for retirement. A planner can help you come up with an investment allocation that takes somewhat more risk but that should bring you greater returns.
You can get referrals to fee-only planners from the Garrett Planning Network at http://www.garrettplanningnetwork.com and from the National Assn. of Personal Financial Advisors at http://www.napfa.org.
• Home equity doesn't affect credit
Dear Liz: Our mortgage is paid off and is no longer shown on our credit history since it's been 10 years. Is there a way to have that information included on our credit report? Seems that our creditworthiness might be enhanced by the fact we own our home outright.
Answer: Credit scoring formulas can be counterintuitive at times. These formulas measure only how you handle the credit accounts your lenders report to the bureaus. So information about your income or assets, including a paid-off home, aren't included in the formulas.
Lenders, however, often seek additional data to assess applicants. For example, mortgage lenders these days are quite interested in potential borrowers' income, assets, job stability and debt-to-income ratios. So the fact that you own your home may impress a future lender, even if it doesn't matter to your scores.
You can't force a lender to report any credit account to the bureaus, and paid-off or closed accounts don't have to be reported for any specific period. But you can keep good credit scores even without a mortgage or other installment loan on your reports. The key is to have and lightly use a few credit cards, always paying your balance in full each month. That should keep your numbers high without requiring you to pay a dime in interest.
• Resources for people with irregular jobs
Dear Liz: In the last two years, many of my friends and former co-workers have been forced to attempt self-employment, independent contracting, freelancing, etc. None of them had any previous experience working for themselves, and none had personal acquaintances who could provide guidance. Not surprisingly, although many have good business and interpersonal skills, none have yet had success.
Please advise of any websites, books, associations or other resources that suggest what pitfalls to avoid (taxes and benefits have been nightmares for many people I know), how to plan before taking the plunge into self-employment and how to maximize the chance of success.
Answer: An excellent place to start would be "The Money Book for Freelancers, Part-Timers, and the Self-Employed: The Only Personal Finance System for People With Not-So-Regular Jobs" by Joseph D'Agnese and Denise Kiernan, two freelancers who figured out through trial and error how to cope with the erratic incomes while trying to pay for their own benefits and keep the IRS happy. The authors' system revolves around putting aside a percentage of all income toward these expenses, rather than trying to save specific dollar amounts, which can be tough on an unpredictable income.
Two other great sources include the Small Business Administration website at http://www.sba.gov and Entrepreneur magazine's site, at http://www.entrepreneur.com.
Your friends also should look for professional groups that can provide networking opportunities with successful freelancers and entrepreneurs in their fields. Nothing beats one-on-one advice and mentoring from those who have figured out how to win the game.
Liz Weston is the author of the upcoming book "The 10 Commandments of Money: Survive and Thrive in the New Economy." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via the "Contact Liz" form at asklizweston.com. Distributed by No More Red Inc.