It’s not every day you suddenly come into a large sum of money and figuring out what to do with it smartly can feel overwhelming. Still, it can happen: some of us might one day receive a sizable payout from a lottery, inheritance or legal settlement.
Imagine this scenario: You’ve just won a lawsuit and after taxes and lawyer fees, you’re expecting about $120,000 as payout. You have $5,000 in debt you want to clear and you need to buy a car for work since you don’t currently own one and it would simplify and reduce your commute. You also have a stable job with a decent income, but no real savings or investments because of past financial missteps. How can you make the rest of that money go as far as possible?
While $120,000 is a meaningful amount of money, it can disappear fast if you’re not careful, deliberate and strategic with your spending. Here’s how to make sure that one-time payout sets you up for lasting financial stability. If you don’t keep a budget, now would be a good time to start one.
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Immediate next steps
Paying off any debt should be one of your first priorities and with $120,000, that $5,000 balance can be addressed easily. Once you pay off that amount, you instantly free up funds you would’ve had to spend on monthly interest payments.
If you don’t have an emergency savings fund, that becomes priority number two. Put away at least three to six months’ worth of expenses into an accessible, high-yield savings account for any unexpected costs. Let’s say this amount comes to $25,000, leaving you with $90,000.
Once you pay off the debt and set up an emergency fund, it’s time to think about a vehicle purchase. While that settlement money makes the price of a shiny new car seem affordable, remember that the costs don’t end at the sticker. Cars lose value quickly and things like insurance premiums and property tax bills will add up. Consider a reliable used vehicle that can combine longevity, efficiency and low maintenance costs. Certified pre-owned models, for instance, can give you the feeling of “new” while lowering your cost and coming with an extended warranty.
Begin investing
After paying off your $5,000 debt, padding your emergency savings at $25,000 and buying a nice, reliable $25,000 used car, you’ve got $65,000 left from your winnings. It may be time to start investing, thinking about tax-advantaged accounts.
A Clever Real Estate survey found that 40% of respondents said they’d blow through a $10,000 windfall without saving any of it and nearly 84% said they’d make unnecessary purchases to “treat” themselves. It’s best to get that settlement money into a spot where it’s safe from any temptation to spend recklessly.
Read more: You don’t have to be a millionaire to gain access to this $1B private real estate fund. In fact, you can get started with as little as $10 — here’s how
You may not be able to easily access it, but investing will allow you to reap compound interest over time. Consider a diversified index fund or ETF portfolio that can spread your money — and risk — across multiple stocks or an index. Since you may be investing tens of thousands of dollars, consider speaking to a financial advisor to help you make the best investment decisions for your particular situation.
You may also want to set aside some of that cash for a Roth IRA to bump up your retirement savings. Note that you can invest up to $7,000 a year tax-free, or $8,000 for those 50 and older.
And now that you’re really doing some financial planning, consider setting a budget for at least the next year or two. Determine your monthly expenses and bills before you add any of the award money; more often than not, the best way to approach a large windfall is to act like you don’t have it.
It’s okay to have a little fun
While it’s usually best to put most of that money somewhere you can “set it and forget it,” don’t be afraid to budget a small one-time expense for yourself if your priorities allow. That could mean saving for a concert, vacation or upgrading your technology — whatever adds a little joy without derailing your plans.
You may also want to consider spending on whatever provides a solid return-on-investment. For example, as Warren Buffet said, “The best investment by far is anything that develops yourself, and it’s not taxed at all.” So, while it’s not traditional investment advice, you may want to spend any “fun money” on expanding your knowledge, skillset or self-improvement.
The bottom line is that by the end you should still have a solid chunk of your award money left to serve as a financial cushion or to help you jumpstart future goals.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.