If you happen to get a windfall, pay off credit-card debt first

Dollars & Sense

December 28, 2003|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE L.A. TIMES

My husband recently inherited about $80,000. He is just a few years away from retirement and wants to make sure he uses this money wisely. Our first thought was to put $50,000 toward our mortgage, allowing us to pay off the house around the time he is thinking of retiring.

We are one year into a $90,000, 15-year mortgage at 5.5 percent. It seems like a smart thing to do, seeing as there isn't much else out there making 5.5 percent without risk.

We aren't sophisticated financial investors, but the peace-of-mind aspect of this is also paramount to my husband. The rest of the money might go to pay off credit cards (although they are currently at 0 percent). We have two kids in college, and we'll probably continue to make monthly payments on their low-cost student loans.

I am a little worried, however, that this infusion of money will make us ineligible for future college loans we will need if we use all this money as described above. Should we worry about that and what should be our priorities be for this money?

Don't worry about your ability to get loans for education. You usually can borrow the entire cost of an education without showing any financial need.

As for your second question: The priorities you just identified for using the money are fine. You just need to rearrange their order.

Whenever you get a windfall, your first goal should almost always be to pay off any credit card debt - even if it's at 0 percent. That low rate isn't fixed and could shoot up with little notice.

Paying off credit cards and other revolving debt also should boost your credit score, the three-digit number that lenders use to evaluate your creditworthiness.

Once that debt is paid off, the next step is to retire any other nondeductible debt. So you'll need to determine whether your mortgage or the student loans are providing any tax advantages.

Many student loans are below 3 percent - inexpensive money by any measure, but even more so if you are able to write off the interest.

As much as $2,500 of student loan interest is deductible each year if your modified adjusted gross income as a couple is $100,000 or less ($50,000 for single people). Your deduction begins to phase out after that point and disappears entirely when your income reaches $130,000 ($65,000 for singles).

Student loan interest is an "above the line" deduction, which means you can write it off regardless of whether you itemize your deductions.

That's not true of mortgage interest. Many homeowners get little if any write-off from their home because they don't pay enough interest to be able to itemize their deductions. The standard deduction for a married couple filing jointly in 2003 is $9,500, which is more than the annual interest you're paying on the loan. Unless you have lots of other itemized deductions, your mortgage isn't giving you any tax benefits, so retiring a good chunk of it is probably a good idea.

I have a question about holiday tipping. Why should I give money to people I've paid throughout the year?

Why, for that matter, should you buy gifts for anyone? Surely they can go out and get what they want for themselves.

Or might that perhaps be missing the point?

Holiday tipping is a way of showing your appreciation for the people who provide services for you. It's voluntary, of course, and there are no hard-and-fast rules, but there are some guidelines - or so the etiquette experts tell us. Whom you tip and how much depends on the frequency of the service provided, your relationship with the provider, regional custom and your own budget.

In general, tips of $10 to $30 are appropriate for those who provide brief but frequent service, such as your newspaper carrier, parking attendant, trash collectors or overnight delivery person. (Some people include their mail carrier in this group. The U.S. Postal Service doesn't encourage tipping, but allows carriers to keep gifts worth less than $20.)

People who provide more sustained service - your hairdresser, part-time house cleaner, garden crew and the like - are usually tipped an amount equal to one visit. People you employ full-time, such as a nanny or housekeeper, get at least a week's pay.

If you live in a building with a superintendent, ask your fellow apartment dwellers how much they give. The range is pretty wide, from $20 to $200. Doormen usually get half that.

If you don't customarily tip, you might try it and see what happens to the quality of service you get.

You could be pleasantly surprised.

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