What Should You Do with a Settlement?
There are different situations where you might receive a settlement or a lump sum of money. For example, maybe once you go about getting legal counsel after a car crash, you receive a settlement from an insurance company. Inheritance is another example of not necessarily a settlement, but a lump sum you might receive.
Getting a settlement or lump sum of cash can bring about mixed emotions. It was probably a difficult situation that led you that lump sum, such as a car accident or the death of a loved one, but of course, most of us do enjoy receiving money.
During this time, even though emotions may be high, it’s important to make wise choices with the money as you would with any other money you earn or receive.
The following are some things you can think about doing with a lump sum inheritance or settlement that is financially smart.
Know the Tax Implications
In some cases when you receive a lump-sum payment, you may not owe any taxes at all, but you may have to pay income taxes on some settlements. The exceptions include personal injury settlements or settlements for physical sickness.
Inheritance money isn’t considered income for federal taxes, so you usually won’t have to report it, but you may have to pay state taxes depending on where you live.
Sometimes people get inheritance taxes and estate taxes confused, but they aren’t the same. Estate taxes are paid by the estate of the deceased person, but inheritance taxes are paid by the person who receives the assets.
Set the Money Aside For Several Months
Once you understand the tax implications of a settlement or inheritance, the next thing you should do? Nothing.
Don’t do anything for several months or even six months, if possible.
This waiting period lets you think about what you really want to do with the money, without the emotions connected to it. You can think and let things emotionally settle down a bit before making any big decisions.
If you spend the money immediately, you are very likely to regret it down the road.
Depending on how much money you get, you might also want to hire a financial advisor.
A financial advisor is not only going to have expertise in areas you may know nothing about, but they are also going to be able to help you make decisions without emotions tied to them.
Sometimes when people get a windfall of cash, their friends and family may come to them for money, and if you have a financial advisor keeping track of things for you, they may be able to help you avoid giving out money while also serving as the bad guy rather than you having to do it.
Invest
If you don’t want to be disappointed in a few months with how you used your lump sum of cash, think long-term. Start paying off debt first, then set aside an emergency fund, which is usually considered around six months of your living expenses.
After those essential things are done, consider how you’d like to invest.
There are many different ways you can invest. You can invest in your retirement fund, the stock market, or you could invest in yourself and your future by starting a business or continuing your education.
It’s often a good rule of thumb to invest in multiple different areas if possible, so you’re not dependent on any one thing.
It’s satisfying to be able to see that you not only still have some of that cash you got but maybe even that you’ve grown it over time.
Splurge Responsibly
After all the things above are done, and you feel confident in your financial decisions, then maybe you treat yourself to something.
A good way to treat yourself is often taking a vacation. When you travel you gain the value of experiences that you may appreciate more than buying “stuff.”
Try to choose splurges that are small and realistic but also meaningful to you. So often, when people receive an inheritance or lump sum settlement, they don’t take the time to think about what really matters to them now and what might matter in the future, and they spend frivolously.
That can then lead to frustration and even depression, so if you take your time and make smart decisions from the start, you’re more likely to be happy even well after you receive the settlement.
Unfortunately I know a few people that did not invest wisely and blew through it in a month or two and then had to sell things they bought just to get by again. A sad situation, but it is always a good idea to plan ahead if you know a settlement is coming so you will have a guaranteed source of income.