Dear Dr. Don,
I've recently come into a small inheritance (about $40,000) and I'm pretty much clueless when it comes to investing. I bought a house a year ago and currently owe about $150,000 on it. Am I better off putting the inheritance toward my mortgage or investing the money somehow and getting the interest?
-- Wendy Windfall

Dear Wendy,

Take a look at the big picture. Do you have an emergency fund? Having three to six months' worth of living expenses set aside for a financial emergency may be the first place to consider putting some of this windfall.

Does your company provide matching contributions in its retirement plan? Are you taking advantage of the matching contribution? A typical company match is one where the company contributes 50 cents for every dollar you contribute, up to you contributing 6% of salary, meaning the company contributes 3% of salary. A 50% return is hard to beat. Your windfall doesn't get contributed to the retirement plan. You use part of your inheritance to replace the income you're contributing to the retirement plan. You still have to decide how the money in the retirement plan will be invested.

What's your attitude toward risk? Rutgers' Investment Risk Tolerance Quiz can provide a quick read on your risk tolerance. The more conservative you are as an investor, the more likely it is that paying down the mortgage makes more sense than investing your windfall. My rule of thumb is that you have to expect to earn more after-tax on your investments than the effective rate on your mortgage for it to make sense to invest the money versus paying down the mortgage.

You can use Bankrate's mortgage tax deduction calculator to estimate the effective rate on your mortgage. However, the calculator assumes you can fully utilize the mortgage interest deduction and that you're not just replacing the standard deduction on your income tax return with the mortgage interest expense. Talk to your tax professional if you're uncertain on whether you're fully utilizing the mortgage interest deduction.