Question: My father died and left me $250k. I want to use the money for a second home, but my wife wants to earmark it for our kids’ college. Who is right?
Answer: By 2048, an astounding $124 trillion is expected to pass from older generations to younger ones. It’s been called the Great Wealth Transfer, and it could have huge implications for those who will inherit wealth.
It could be a source of conflict.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
When an inheritance comes through, it’s not a given that you and your spouse will be on the same page as to how to use it. If you recently inherited $250,000, you may be hoping to use the money to buy the second home you’ve always wanted. But if your wife wants to use the money to fund your kids’ college education, you might struggle to come up with a compromise.
Here are some important points to consider in the course of making that decision.
Understand the costs of buying a second home
There are many benefits to owning a second home. That property could serve as your personal escape, or it could even become an income stream.
Before you decide whether to use a $250,000 windfall on a second home purchase versus college, it’s important to understand the total costs of buying a second home and recognize that your inheritance may not come close to covering all of them, says David Johnston, wealth management advisor at OnePoint BFG Wealth Partners.
“My first thought when posed with this question was a $250,000 down payment is just the tip of the second home journey,” Johnston says.
As he explains, many people underestimate the total cost of owning a second home. In addition to mortgage payments and property taxes, there are home insurance, maintenance, repairs, and potential HOA fees to consider.
Plus, as Johnston points out, “Has anyone bought a place without doing some sort of upgrading? Even a coat of paint?”
Before deciding whether to use the $250,000 on a vacation home, Johnston recommends calculating what you’re likely to spend outside of that money and making sure you can afford it.
“In today’s markets, what percentage of a down payment does $250,000 represent?” Johnston says. “I’m thinking quite short of 50%, leading to larger monthly payments, especially with mortgage rates still hovering between 6% to 7%.”
Even if you’re planning to rent out the home to offset your costs, Johnston warns that doing so could lead to higher insurance premiums.
Plus, he says, “You’ll likely need to hire a property management company to coordinate the rental calendar, keep the place tidy after each stay, and answer the maintenance calls.”
After accounting for all of that, you may find that the second home is less affordable than expected, even if you’re able to use your inheritance to cover a sizable down payment, furniture, and some initial updates.
Recognize the psychological impact of student debt
Because there are plenty of affordable ways to borrow money for college, you may be inclined to prioritize a second home over your kids’ higher education. But Johnston warns that just because your children can borrow for college doesn’t mean it’s an ideal situation.
“The psychological impact of feeling like you can’t get ahead because of the debt service albatross is significant,” he insists.
Plus, Johnston says, “Every dollar your child needs to put toward student loan payments is a dollar not going into their short-term savings.” That could make it very difficult for them to build a safety net as young adults. And it could end up being a huge source of stress.
A recent Pew Research Center survey found that 51% of student loan borrowers do not feel financially secure. And data from ELVTR finds that 54% of Americans have experienced mental health issues due to carrying student debt, while 84% have delayed at least one major life event because of it.
You’ll need to decide whether you want to expose your children to the drawbacks of student debt, given that there may now be a way around it.
Plus, as Johnston points out, “Depending on the ages of your children, the tax advantages of 529 plans could be impactful. Play by the very-easy-to-abide-by rules, and you gain tax-free growth and tax-free withdrawals.”
Figure out your priorities
What makes this situation tricky is that both a second home and paying for college could have a positive impact on your family as a whole. That’s why Brian Safdari, founder of College Planning Experts, says it’s important to do some soul searching and figure out your priorities.
“Whether you’re purchasing a second home or funding your child’s education, each option is an investment that can benefit the family in different ways,” he explains.
Safdari says it’s important to understand your family’s goals before making your decision. If the goal is financial security, both options could lend to that. A second home, for example, could appreciate over time, creating more generational wealth. It could also generate future income to support retirement.
Of course, a college degree could be a great investment, too, Safdari says.
“Based on numerous studies and statistics, individuals with a BA or BS degree or higher earn over $1 to $1.5 million more in lifetime income compared to those without a degree,” Safdari says.
Ultimately, Safdari says, the right decision is the one that brings your family the most happiness and fulfillment. And if you and your wife are struggling to make that choice together, it’s a good idea to get some help.
“My advice is to work with a holistic fiduciary advisor who acts in your best interest, helps you evaluate both options, reviews the risks, benefits, and trade-offs, and aligns these decisions with your short-term and long-term financial goals,” Safdari says.
