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Ask Dave

Being Wise With the Inheritance

Lynn's wife is about to receive an inheritance, and Lynn wants to take his business full-time. They have $70,000 in debt. Should they pay off debt, invest the money, or use it for the business?

QUESTION: Lynn in Alabama and his wife make about $110,000 a year, not including his wife’s bonuses. He does auto detailing on the side and makes about $400 a month. His wife is about to receive an inheritance, and Lynn wants to take this business full-time. They have $70,000 in debt. Should they pay off debt, invest the money, or use it for the business?

ANSWER: All your debts should be cleared, regardless of whether you have a business or not, before you start your investing. If you are on the same page and on a written budget, then get into unbelievable attack mode and knock the debt out.

If I’m in your shoes, I’m selling the $22,000 truck and the $23,000 Durango. That’s your problem right there. Get a couple of cars that you can actually afford. You guys make $100,000 a year and you’re freaking broke, and you’re riding around looking like you’re not. The trick to getting out of debt is to quit pretending.

I’m not going to be very popular in your house for a while. If your financial plan is to sell her car, then you’re not on the same page. Of course she’s not going to like your plan. If you are getting $100,000 in the inheritance, you could pay off this stuff and keep the trucks if you want to, but here’s the trick. You guys have got to stop what you’ve been doing, because you only get one of these inheritances.

You have to have an agreement between the two of you that you are not borrowing any more money. Hand over the credit cards and have a plasectomy party right now. Next time you get ready to buy a car, you save up and pay for it. That’s why her mother had money to leave you with this inheritance, because she didn’t borrow money.

Up until the inheritance came, you were doing stupid. You can’t do stupid and win. You have to stop borrowing every time you want something. If you use this inheritance money and pay off all these debts, then look up five years later and you’ve got two new trucks in the driveway with debt, and your detailing business didn’t work out, and you’re sitting there making $105,000 a year with $50,000 in debt after you went through mom’s inheritance, your wife will be bitter—and rightfully so.

If I could get you to change your behavior, I’d tell you to write a check and pay everything off with the inheritance. That will give you the cash flow to move your business to a very inexpensive little rental place. Don’t spend much money on this business because it’s not making any money. You are just trying to get your garage back. I’m talking a couple hundred bucks a month max on your location.

You want to rent something very cheap. You can get money in a savings account to fall back on and then make this business self-sustaining to cover itself. But the big deal here is that you guys have got to have a marriage meeting where the TV is off and the kids are asleep and you’re looking at each other across the kitchen table saying that what you’ve done so far has brought you to where you are, and you’re not proud of it. Then you have to ask what you’re going to do.

You have to change your habits, because just paying off the debt is not going to change your life. Changing your habits and paying off the debt will rock your world. It will change your life dramatically. I would write a check and pay off the debts only with a complete commitment to habit change.