A Hawaiian couple recently inherited $400,000 and asked Dave Ramsey what they should do with it. This YouTube video has the entire exchange, and Dave doesn’t hold back any punches. He’s pretty candid about what the couple should do and gives the couple the motivation to change their financial future. 

I’ll share my thoughts on the video, but it is always good to speak with a financial advisor if you can.

Start Off by Paying Off Debt

 

When the couple asks Dave how to proceed, he immediately asks how much debt they have. Dave Ramsey usually centers his advice around paying debt and doesn’t believe that good debt exists. He wouldn’t borrow $1 billion even if it was at 0% APR.

However, this question opens the floodgates into the Hawaiian couple’s financial troubles. The couple has a $200,000 mortgage balance, which may not be bad if the monthly payments are reasonable and the APR is low. We don’t get that information during the call.

The remaining financial obligations paint a more troubling picture. The couple owes $20,000 in business credit card debt, has a $13,000 IRS repayment plan, and a $4,000 auto loan. 

Dave Ramsey suggests immediately knocking out the IRS repayment plan, credit card debt, and auto loan. This advice is pretty solid since you don’t want to deal with owing the government money, and APRs are higher for credit cards and auto loans.

He also mentions that the couple shouldn’t be worried about AUD to USD exchange rates. This detail is important since the husband received his $115,000 inheritance in AUD, which he’s currently keeping in an Australian bank. Dave Ramsey admits to not knowing much about exchange rates, but the couple doesn’t seem to know much about them either, making a foreign exchange conversion the best approach.

Save for Retirement

The couple is self-employed and does not have any retirement savings. While some people think they can work forever, health conditions can impact them later down the road. It’s good to build a nest egg, and even if you never retire, you can use it to travel or pass it to your heirs.

Dave offers two approaches to saving money. The first approach is to save the extra money you have after paying off the IRS, business credit card debt, and auto loan. The couple will then have an easier time keeping up with mortgage payments. They can tuck the money away in a high-yield savings account or consider straightforward ETFs that track indices like the S&P 500.

The second option is to pay off all debt, including the house. Then, the couple won’t have monthly mortgage payments. They can use payments meant for the mortgage to build their retirement savings.

It’s easier to know which approach is the right one if you know the monthly mortgage payment and the APR on the loan. The monthly mortgage payment may be much easier to make now that the IRS, business credit card debt, and auto loan are gone. However, if the mortgage has an 8% APR, it makes sense to get rid of it.

A lower APR makes it easier to generate a higher return in the stock market. If the mortgage has a 3% APR, you can find some dividend stocks with higher yields and moderate appreciation. The stock market tends to have annualized returns well above 3%, but it starts to get dicey if you have a higher APR.

Become Financially Disciplined

Dave expressed that he has some concerns about someone who has never been financially disciplined suddenly becoming financially disciplined once they end up with a lot of money.

It’s a valid point, and Dave offers some motivation to get the Hawaiian couple on track. Like a stern but caring parent, Dave implores the couple to honor the memory of the people who left this money by making their financial habits more like their benefactors.

Dave also warned that the couple will end up with the same debt if they do not change their financial habits. Setting a budget and sticking to it can help the couple get a new start with their finances and gain more control over their money.

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