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Question: I’m 24 years old and my Nana died recently and left me $5,000. I have about $6,500 on my credit cards that I would love to pay off, but I am thinking about putting half of my inheritance in stocks that pay dividends.

My uncle says it doesn’t make any sense to use all my inheritance pay off my credit cards because I will still have a balance with nothing to show for it. He also says I could potentially make more in the stock market if I leave it in there until I really need it.

My mother is not sure what I should do. She said, “Ask someone who knows about these things for help.” So I am asking you.

Angela in Boston

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Howard Dvorkin CPA answers…

Your uncle makes a good point, Angela. Unfortunately, it’s not the one he intended.

First, let’s do the math.

You didn’t tell me what interest rate you’re paying on that $6,500 in credit card debt. The national average is just over 14 percent as of this moment. (It constantly shifts, as you can see here.)

Stock market returns can top 30 percent a year like they did in 2013, or they can be as low as 2 percent like they were in 2011. Then there are years like 2008, when average returns were negative 36.55 percent. (See nearly 100 years of returns here.)

Of course, that’s the nature of the stock market — you just never know. Experts spend their workdays and lifetimes trying to decipher market fluctuations.

Unless you plan to spend at least some of your free time monitoring your investment, I must disagree with your uncle. However, he raises two issues even though he probably didn’t mean to.

Investing is good

Your uncle is encouraging you to invest in your future instead of focusing on the now. While the stock market might be too risky, you have many other ways to invest your money. If your employer offers a 401(k), sock away as much as you can. You can even open your own retirement account in a number of ways.

I know what you’re thinking, Angela: I’m only 24. Why do I need to save for retirement now? The answer is simple and profitable: Put away even a little now, and over the decades, it will grow many times over. Your uncle probably knows that savings and money market accounts are offering less than 1 percent interest these days, so he pointed you to the stock market. However, even the safest retirement accounts will earn you hefty returns over the long haul.

Changing habits instead of balances

You uncle might have been subconsciously suggesting something else: If you pay down your credit card balance, will you just be tempted to run it up again?

You really need to ask yourself: “How did I get $6,500 in debt?” As a CPA for more than two decades, I’ve counseled people who inherited much more than you have, Angela. I’ve watched them squander huge sums because they never took a hard look at their spending habits.

That’s why my advice in this case has nothing to do with the inheritance. Your first step, Angela, should be to use our free Debt-to-Income Ratio Calculator, which will reveal some insights into your finances.

Once you do that, I don’t think you can go wrong if you invest or pay off credit cards – or both.

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