Q. I will soon be receiving about $200,000 as an inheritance from my beloved grandparents. I want to do the right thing(s) with this money. I am married with two children. My husband and I are in our late 30's and our oldest child will be going to college in 6 years, our youngest in 12 years.

Our total debt, which includes our mortgage, is about $190,000. Our home is valued at $250,000. If we paid off all debts including our mortgage, we could comfortably invest $1,400 a month, possibly more. We could also invest the entire inheritance and keep paying on this mortgage or refinance to a 15-year. There are so many options my head is swimming! Which course of action should we choose?

---LS, by e-mail


A. If you invest the inheritance you will do two very positive things. First, you'll have greater security because you'll have a source of money if you ever need it. With $200,000 of investment money you could sustain all of your current debts and your standard of living through a lengthy period of unemployment. Someone with a debt-free life and no savings or investments, however, could be forced to sell her house to raise money for regular living expenses. Security isn't debt free ownership; it is having the funds to sustain your standard of living without working.

Second, the odds are that investing the money in a lump sum (or over a relatively brief period of time such as a year) will produce better results than a 30-year program of monthly investments. If, for instance, you invested $1,400 a month for 360 months and achieved a long-term return of 10 percent, you would accumulate $3,164,683. On the other hand, if you invested the $200,000 at 10 percent for 30 years, it would grow to $3,489,880--- a premium of $225,000.

These examples don't take into account either the tax savings on deductible mortgage interest or the taxes on your investment income that will work to reduce your return somewhat. The best way to reduce the tax drag on your investment is to commit to a tax efficient fund such as Vanguard Tax Managed Growth and Income, a version of their Index 500 fund that seeks tax efficiency.


Q. I need help with converting to a Couch Potato Portfolio. I am 36, an actor in the theater with mixed periods of work, and I am invested in Vanguard funds. I have just opened the Total Stock Market fund and the GNMA Fund after getting battered in Vanguard U.S. Growth fund.

I have saved $50k in a money market because I am thinking about buying a home but prices of apartments in New York City are so inflated that I am reconsidering that plan.  I have a rent-stabilized apartment so I am confused abut what to do.

Should I cash in my U.S. Growth, taking a $9,000 loss, and continue stocking up cash for an apartment or should I put that money in the Total Stock Market fund? Or should I just leave it be?  I own a number of other funds, as well.

---JD, by e-mail


A. Why give up the rent stabilized apartment? Odds are you will never find a better deal. I've known people who have moved away from New York but continued paying rent on such apartments because they know they'll never be able to replace them.

That said, you might consider developing an alternate plan: buy a recreational house that could become your retirement home. You wouldn't be the first--- many people find it practical or necessary to maintain a 'Work' residence and a 'Real' residence. It's a big country. Most of it is much less expensive than New York.

If you are going to be a true Couch Potato, you'll need to abandon your U.S. Growth shares and switch to Vanguard Total Market. That's the only way to be invested in the U.S. market as a whole rather than being involved in stock or sector picking. If the fund with the loss is in a taxable account you can take the loss and deduct up to $3,000 a year against ordinary income until the loss is used up.