Winning a settlement can be exciting. According to Nolo.com, the average personal injury settlement is $52,900. That’s a lot of money!
But before you go off and spend all your settlement money, it’s important to evaluate the best way to use the new funds.
Below are some tips to guide you in that process:
Don’t rush anything
The first thing you should do after receiving your settlement money is put it into a savings or checking account. This allows you to take a deep breath and evaluate all your options before spending it (and keeps it safe in the meantime).
At this time, you should also be prepared for banks, other financial institutions, and even family members to reach out to you. Why? Once people learn that you have come into a large sum of money, they may want to offer ways for you to invest it, ask for a loan, etc.
However, you should be careful before accepting any such offers and requests. You don’t yet know what the best use of the money is.
Understand the tax implications
Most settlements aren’t taxable. However, there are a few exceptions where a part of your settlement could be subject to tax, such as punitive damages, damages related to breach of contract, and interest accrued on a judgment amount.
Consult a reputable personal injury lawyer to know whether any of your settlement is taxable. Once you know, you can set aside a portion of your funds to cover the tax liability so you’re not tempted to spend it. Then you can start making plans for the rest of the settlement funds.
Create a plan
At this point, you’re ready to create a plan for how to spend your settlement. The key is to create a detailed plan for how to use it and not spend it all at once.
To begin, you should consider how long you need the settlement fund to last. Must it pay for any ongoing medical treatment or recovery costs? Strategize what you want the money to do for you and your family over the long run. Keep in mind that some settlements are awarded as a lump sum while others are paid out in installments as part of a “structured settlement.”
Now here are a few ways you may want to consider using your settlement funds:
1. Set aside an emergency fund
Experts recommend that you always have an emergency fund that can cover three to six months’ worth of living expenses. So if you don’t already have one, you may want to consider setting aside part of your settlement as an emergency fund.
2. Take care of immediate necessary expenses
Of course, if you have immediate necessary expenses, you should make sure to pay these first. These could include medical bills, housing costs, food, and so on.
3. Pay off debts
Another good way to spend your settlement is on debt reduction. This could be credit card debt, a car payment, or a mortgage. Living debt free is a great feeling and your new settlement funds could be just what you need to get there.
4. Invest in retirement
Saving for retirement is another good way to use your settlement money. This could mean investing in the stock market, real estate, annuities, or a number of other financial products. Or you may just want to pay off your mortgage so that it ceases to be a liability and turns into a true asset. The point is to save and invest enough so that you can retire comfortably.
5. Get life insurance
Winning a settlement can be a good opportunity to take out a life insurance policy. After all, many settlement cases prevent you from suing the other party again in the future (for the same offense). So to help ensure your family is taken care of no matter what happens to you, it may be a good idea to get life insurance.
6. Pay for an education
Lastly, you may want to use your settlement money to invest in your education. A degree or certificate could help increase your income potential and set you on a path to more long-term financial stability. In that sense, your settlement could provide the career start you never had. Just make sure you do your research to find a good program that will help you reach your goals.
The bottom line
At the end of the day, your settlement is yours to spend how you want to. But it’s best to spend it responsibly.
Beware of quick decisions, bank pitches, get-rich-quick schemes, lending to family and friends, and neglecting family responsibilities. If you manage to spend your settlement while avoiding these things, you’re off to a good start.
