What should I do with ym insurance settlement?
August 8, 2006 7:34 AM   Subscribe

What should I do with my insurance settlement money?

I got hit by a hit-and-run driver about two years ago, and I've finally settled with my own insurance company for somewhere around ~80,000.

I'm 24, I've got very little debt, and very little idea about what to do with this money besides some nebulous idea about "investing" it. If you had 80,000 fall into your lap, what would you do?
posted by SweetJesus to Work & Money (20 answers total) 8 users marked this as a favorite
It's not enough to buy lots of shiny new stuff (houses, cars, etc), so pay off your debt in full and then stocks.
posted by The Michael The at 7:36 AM on August 8, 2006

Graduate School. Investing in yourself.

Or: it is enough for a nice down payment on a house.

Check your tax situation before doing anything else, though.
posted by amtho at 7:40 AM on August 8, 2006

Response by poster: Check your tax situation before doing anything else, though.

No taxes or liens - it's a first party insurance settlement in MA.
posted by SweetJesus at 7:42 AM on August 8, 2006

posted by geoff. at 7:43 AM on August 8, 2006

First off, make the 'little debt' into 'no debt at all'.

Then, pay your rent for the next few months and travel the shit out of the world. With 80k you can do this as (un)comfortably as you choose.

But if travelling's not your bag, I'd second the suggestion for graduate school. Now's your chance to indulge yourself (intellectually at least).
posted by slimepuppy at 7:47 AM on August 8, 2006

Best answer: Well, I'm 27, have very little debt, and would love to have $80k fall into my lap (although the whole 'hit by a car thing' would suck a bit).

Here's what I'd do:

Toss a couple k's to various charities.

Use $5k or so to do some badass vactationing. Wisest investment in the future? Probably not, but the experiences and memories would definitely be worth it, and who knows what lies ahead. At 24, you've likely got little strings attached and it may be your only opportunity to do it while you've got the stamina and energy.

The rest ($60-65k) I'd invest diversely. Something long term that you can't touch (and is tax free), something risky with the potential for some great payoff, and something secure that you can withdraw in the next 5-10 years without being penalised when you do need to make a down payment on a house, car, or grad school. In all honesty, I'd likely hire a financial advisor for this part.

You've got a huge leg up on your peers (minus the trust-fund babies) and good on you for not blowing it on a fabulous three week coke and high priced hooker binge. But don't be afraid to have a little fun. You have earned it.
posted by Ufez Jones at 7:50 AM on August 8, 2006

1st - Ask a financial advisor
2nd - Invest in a index fund.
3rd - Don't forget about me!
posted by Mr. Gunn at 7:56 AM on August 8, 2006

Debt first. I assume this is credit card debt, so the interest is higher than anything you are going to get in the market now.

However, if you are thinking about grad school, you can usually do better than the prevailing student loan interest rate with a semi-conservative investment in value stocks. Since student loan interest is tax deductible, and subsidized interest rates are (still) pretty low, there's not much advantage to prepaying for grad school.

Your use for the 80k itself should be a down payment on a house. Not anytime soon, of course, but a wise investment strategy will pay off in terms of that down payment and more in several years. Don't blow more than 10k of this with travel or other spending.
posted by Saucy Intruder at 8:03 AM on August 8, 2006

Like everyone said, pay the debt.... absolutely no question, as if you let that go, the interest will negate a good chunk of what you have.
posted by rolypolyman at 8:07 AM on August 8, 2006

I like Ufez Jones' suggestion. I know that investing the money may seem boring — you could have some shiny new goodies right now! — but if you have the discipline to do it, your older self will be eternally grateful. Compound returns favor the young.

Assuming a 10% annual return (which is rather generous, I admit), if you invest all of this money now, you could have a million dollars at age 51. But even a 7% annual return gives you a million dollars at 62. Seem like a long way off? It's not.

If I were in your position (and knew what I know now), I'd spend a few thousand on travel (as Ufez Jones says, have some fun!), and then tuck the remaining ($75,000?) in some aggressive investments. I'd then be sure to contribute a few thousand a year to this account.

Before you spend this money, take some time to explore the magic of compounding so you understand just how much money you're throwing away by buying a new car or by living he high life. The sooner you start investing, the better.

(Don't I sound like an old man?)
posted by jdroth at 8:09 AM on August 8, 2006

Best answer: Right off that bat, put as much money as you can into a Roth IRA (that amount depends upon how much earned income you have for the year). The advantage of a Roth IRA is that the money has already been taxed as income, and will never be taxed again - including any interest it generates. Some quick back-of-the envelope calculations (and these are all very round, simplified, easy numbers):

Assuming you can put the 2006 max of $4000 into a Roth, that's $4000 tax-free dollars in your retirement account in 2006. Let's say you never put in another penny, and you don't retire until age 66, after leaving that money alone for 42 years. The "Rule of 72" says to divide 72 by the average interest rate earned to get the number of years it will take your money to double. If your Roth investment makes the long-term market average of 12%, that means your money will double every six years.

Value of that original $4000 in:
2012: $8000
2018: $16000
2024: $32000
2030: $64000
2036: $128000
2042: $256000
2048: $512000

So basically, that four grand you put aside right now in a Roth becomes a half million tax-free dollars at retirement. That's not something you should pass up.
posted by Lokheed at 8:09 AM on August 8, 2006 [2 favorites]

Oh yeah -- debt first. Duh.
posted by jdroth at 8:10 AM on August 8, 2006

Best answer: I absolutely second Lokheed's advice. Keep some money to spoil yourself, but absolutely sock away the $4K (it goes up soon to $4,500 or $5K, doesn't it?) into an IRA. Starting in our 20s gives us a HUGE boost, and if you invest the maximum (which will become $5,000 in a few years) every year, you can retire on millions. Check out this article, in particular, the graph. I am not an investment person, or even overly skilled in finance, but I think the best bet is probably the one in that article: invest in index funds. (Or read The Little Book that Beats the Market, which claims to get upwards of 20% returns. No clue if it works in practice, though.)

Of course, you'd be crazy to not keep some of the money around to spoil yourself with. (The money that you're going to keep in the bank should be put into something that earns interest--my savings account earned me 0.25%, and then I found out about the money market account that earned me 2.25% and was otherwise about the same. Make sure you look into things like this, because they'll make a big difference.)

As others said, the best course of action is definitely to pay off your debt first.
posted by fogster at 8:38 AM on August 8, 2006 [1 favorite]

Best answer: Have you read about CD ladders?
posted by kimota at 8:46 AM on August 8, 2006

Don't forget inflation though! Having a million dollars in 30 or 40 years is all well and good, but a million dollars could well only have the purchasing power of $400-500k today (or worse if the US dollar continues to tank). Definitely sock away $4K though. Investing all your money for retirement is crazy, but investing nothing is even worse.
posted by wackybrit at 9:33 AM on August 8, 2006

I'd split it up.

Take $1k-2k and have fun with it. Buy some toys. Get it out of your system.

Take $5k-10k and travel internationally for a while. This is fun, but it also falls under the category of "investing in yourself."

The rest depends on your long-term goals:
1. Education;
2. Home ownership;
3. Retirement;
4. College fund for kids...?

This is where an investment advisor or financial planner can help you allocate the funds most effectively. Just off the cuff, if you set aside $20k for school (if that interests you), $15k for a downpayment on a house/condo (again, if that interests you, but I'd say it would be a smart move), and $35k for when you're old and gray, you'd be in excellent shape, IMO.

(minus whatever current debt you have).
posted by adamrice at 9:38 AM on August 8, 2006

You might find it useful to hunt up and read some stuff written by and about lottery winners. Your windfall is smaller than some of theirs, but I rather suspect lots of the same principles will apply.
posted by baylink at 9:56 AM on August 8, 2006

SweetJesus: What was the $80,000 from your own insurance company intended to cover? Is this for medical expenses, and do you owe any doctor/hospital bills? Even if you're paid up on your medical expenses, you could have hidden problems that will show up years later, even if you feel fine now. So keep some of that money where you can get at it if you need it.
posted by Joleta at 11:39 AM on August 8, 2006

Best answer: Do you currently work in a job that has a 401k? If so your best long-term retirement option is to alter your 401k contributions such that they're at the legal maximum. You don't have to pay tax on that settlement money but you DO have to on your regular income, so putting the 15k maximum in every year effectively makes money by avoiding the tax on it.

So, if you put that money in a standard savings account over at IngDirect.com and made 4.3% and made withdraws out to make up for the 15k going into the 401k you'd effectively be making 4.3% + your marginal tax rate immediately. Additionally, if you are using a traditional 401k and not a Roth 401k you'll actually only have to withdraw 15k * your tax rate (11.25k if that's taxable at 25%) out of the savings every year, meaning you could do this max-out for about 7 years.

As others have said, however, you should become completely debt-free before you do anything else, possibly with the exception of tax-deductible interest such as a mortgage, though personally I think paying 0 interest is better than tax-deductible interest...

And jdroth... "Assuming a 10% annual return (which is rather generous, I admit)" Why is that generous? The stock market has appreciated at about 10.5% per year average for the last 80 years, hasn't it? Why not assume that return?
posted by phearlez at 11:44 AM on August 8, 2006

Ditto the CD laddering. But only a protion of the money - say five $2,000 each for five years ($10,000 total).
posted by ObscureReferenceMan at 1:14 PM on August 8, 2006

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