Ask Brian: How Should I Invest Settlement Money?



Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

Question from Kinsley: Hi Brian. Last week I was notified that a settlement for a horrific car accident is about to become available and I can expect to have the money in about two weeks. The settlement is for $600,000 which is an enormous amount of money to me. I’m just an average Jane. I’m 42 years old and divorced with two teenagers. I own a modest house but still owe about $164,000. I have a car payment and other debt that comes to about $23,000. I see this big lump sum of money as an opportunity for me to get ahead in this world and hopefully do more than just pay for my kids’ college. But I know that I’m not smart enough about investing to do this myself. What should I do?

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Answer: Hello Kinsley. Congratulations on your large settlement and I hope you’re fully recovered from the accident. Normally, my first suggestion would be contacting a CPA or tax advisor (and is still my suggestion) to determine how to minimize the taxes and help you understand how much of the money is actually yours after paying taxes. Your good news is that money received as part of an insurance settlement is typically not taxed. But check with a tax advisor to be sure this applies to all the money you will be getting.

And keep that CPA or tax advisor phone number handy because you’ll need more tax advice as you decide how to invest your money. This is a time when you should be seeking professional advice. Other professionals that you might want advice from include an investment professional, an estate planning attorney, a real estate agent, and probably an insurance agent. Before deciding who to go with, talk to several in each profession and get recommendations from people that you already trust. Keep in mind that these people are not there to tell you what to do. Their role is to explain and help you understand your options. My suggestion is that you talk to each of these professionals and then do nothing for several months. For a few months, think about your options and what you want to do. If you have an immediate urge to do something extravagant, set a firm and reasonable budget for the extravagance, maybe $10,000 for a new wardrobe and a vacation. But don’t spend any more until you make some well-thought-out decisions for the remainder of the money and your future.

You are going to have four general options. You can give some of the money away (charity), spend some on yourself/family, pay off debt, and invest. Most people that receive a big windfall decide to do a little of each. A good place to start is by budgeting a specific amount for each option.

But you will still need to make a lot of decisions for each of those choices. For instance, should you pay off the mortgage on your house? With the amount of money that you now have, chances are you will soon decide to buy a bigger home. That alone comes with several decisions. Instead of paying off the mortgage, you could sell your current home to upgrade to a bigger home. Or you could keep your current home and turn it into an investment property. Even an investment property comes with choices. You could turn it into a rental if you’re okay with becoming a landlord. Or you could seller-finance a sale for an income stream. These are all reasons why you need a good CPA or financial planner to help you understand the numbers, taxes, profits, and risks of each possible choice.

Kinsley, your car payment and other debt are small enough that it probably makes sense to pay these off so that you aren’t making any more high-interest payments. But before you trade your car in for a luxury model, it makes good financial sense to work on your investments first to create future income streams to pay for the luxuries that you are going to want. The other thing that I suggest you do quickly is set up an emergency fund. You should always have three to six months’ worth of expenses saved in a money market account to deal with big emergencies. That gives you a strong foundation to begin making sound investment decisions. This is also probably the time to put a complete plan in place to finance your children’s college expenses.

After a few months of taking care of priorities, you should still have most of the money available to invest in your future and hopefully the future of your children. Kinsley, since you asked me, you should know that I’m going to recommend investing in real estate. Good real estate investments accomplish two important things. Real estate investments provide an income stream that can continue for many years (into retirement) and they have a long history of appreciating in value to keep up with inflation. Even after you take care of priorities, enjoy some of the money, and establish an emergency fund, you’ll probably still have close to $500,000 to invest. A good financial advisor will almost certainly suggest that you diversify some of your investment outside of real estate. And that is a good idea. In the end, you will probably never see this kind of windfall again – by using it wisely, you should be able to enjoy it the rest of your life and leave a legacy for your children!

Please add your comments.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to askbrian@realtybiznews.com.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.