What to Do With a Cash Settlement

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Individuals may receive cash settlements as a result of selling their life insurance policies, winning the lottery or receiving compensation for an accident. Persons will sometimes receive monthly or annual payments of the settlement and then contract with a third party to convert their payments into a reduced lump sum of money. Since individuals can easily waste the money from a large cash settlement on frivolous purchases, they should carefully consider how they spend their money.

Spend

  • According to Peter Toll of Family Heritage First, 70 percent of lottery winners will lose their winnings within a few years of winning a large lottery and accepting a lump-sum settlement. Individuals should save most of their money and only purchase items that provide utility. For example, they may want to purchase a modest home for cash or a medium-range vehicle. A cash-settlement recipient should not go out and purchase a multimillion dollar home and luxury vehicles with her new-found wealth.

Pay Off Debt

  • Cash settlement recipients should pay off all their short-term debt obligations, including credit card debt, medical bills and personal loans that have a high rate of interest. In addition, individuals who receive a settlement may want to pay off the remainder of their long-term debt, including car, business and home loans, in order to have financial security in case they end up losing their money on wasteful expenditures.

Invest

  • All individuals who come into a significant amount of money should consult with a financial planner and an adviser on how to manage their money. They can invest their money on their own or choose an investment manager to invest their money for them. Prudent investments can include conservative mutual funds and a balanced portfolio of stocks across different asset classes. With a large settlement, individuals should place at least part of their money in a checking account, United States Treasuries or a certificate of deposit to earn a low rate of return with no risk.

Gift

  • Aged or terminally ill persons who cash out their life insurance policies may choose to set up an estate to gift their possessions to children and friends. Lottery winners and those persons receiving compensation for an accident may also choose to share their new-found wealth with their family and friends. Cash-settlement recipients should be conservative about giving by restricting gifts to an inner circle of immediate friends and family, and they should not let family members and friends borrow money for speculative business ventures.

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