After a long and grueling lawsuit, receiving your settlement money is a welcome step. But you’re likely to get a large sum of money all at once, which isn’t something you’re used to.

When you’re accustomed to monthly paychecks and not a lump sum, it can be challenging to stay on top of your finances without blowing the entire settlement in the first year. To begin with, there are always tax considerations, and you’ll want those are going to affect your money before you begin to spend it.

Benjamin L. Grosz, a tax and estate planning attorney at Ivins, Phillips & Barker in Washington, DC says that understanding the tax implications from the very beginning is essential to effective management. “It’s almost always best to get tax advice before finalizing (and documenting) the terms of a settlement,” says.

“Under federal tax law, most types of settlements (or judgments) will be subject to income taxes.” Those taxes can eat up a considerable chunk of your award, and you’ll want to be ready to use whatever’s left over very wisely.

Here are some tips for managing your settlement money in a smart way.

1. Opt for a Structured Settlement

Though it’s not always an option, a structured settlement can help you avoid spending all of your income at once, because the funds get paid out in increments over a period of time. There are pros and cons to a structured settlement, but in general, it’s a good way to manage a large incoming sum of money wisely, particularly because it can be tax-free.

You won’t have control over all the money you have coming, but you won’t be able to blow it all in one sitting either. It promises regular income for years.

2. Invest Wisely

Investments can be a smart way to take a small amount of income and double or triple it. There are many ways to invest your money, whether it goes into a business infrastructure, stocks, or real estate.

Carefully evaluate the different ways you can safely invest your money for the highest returns. If you do your research and seek proper legal counsel, you could see significant growth in your original settlement.

3. Seek Professional Financial Advice

Most people don’t have a sufficient financial background to make wise investments with their settlement money on their own. Even professionals who do can benefit from counsel.

Seeking the advice of a trusted financial expert can help you keep a level head when you’re making important financial decisions such as how to invest the money in the stock market or budgeting tips.

Try to seek advice before you reach a settlement. A lot of emotions can surface during the course of the negotiating process, and you wouldn’t want to make an irrational decision because your feelings got in the way.

A financial advisor can help you create an actionable plan for spending, saving, and investing any money before it comes.

4. Target Debts

Before you have the money in hand, targeting debts would seem to be a reasonable move. But once the check is in the bank, you might decide to spend the money on something for which you wouldn’t otherwise try to take out a loan.
Don’t fall for the temptation to spend the money right away. Pay off any large debts first, whether they include student loans, personal debt, credit cards, outstanding medical expenses, or anything else that’s outstanding.

Target the high-interest ones up front and work your way down. If you run out of money before the debt is cleared, at least you’ll have taken care of the most expensive liabilities, and saved a lot more money you would have paid in interest over the long haul.

5. Save for Education

Investing in further education will likely be the wisest thing you could do with your money. Education opens a world of possibilities to make back the funds you spend on schooling. As you improve yourself and find better jobs, you’ll see steady returns that will last you for the rest of your life, not just the amount of time your settlement money sticks around.

Categories: General