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Be wise with a windfall
Dear Debt Adviser:
I received a $35,000 settlement and I have $30,000 in credit card
bills and $30,000 on a home mortgage. What should I do with the
money I received? Collect interest, pay off the smaller credit card
bill or invest the money?
Gloria
Dear Gloria:
You are indeed a wise woman. In no part of your question did you
ask, "How should I spend the money I received?" You have
instead asked what would be the best way to use the $35,000 to your
best financial advantage.
It is human nature to immediately think of all the
things that you would like to buy with the money. However, without
a plan, the money could be gone before you know it and leave you
with not much to show for it.
You and others who receive a financial windfall should
consider the following before deciding how to use the money:
- Determine if the money you have received is
considered taxable income. This is important because you will
want to make sure to include putting aside some of the money to
pay Uncle Sam in April in your plans for the money. No one wants
a surprise tax bill!
- Establish an emergency-savings cushion.
Consider bolstering your savings to a level of 3 to 6 months of
your monthly expenses. Use an accessible, high-yield, low-risk
savings or money market account. The interest will be small, but
these savings will help you avoid charging unexpected expenses
on a credit card and will help bridge any gaps in employment.
- Pay off high-interest debt. With the current
investment landscape, you will be unlikely to earn more by investing
the money than your credit card debt is costing you in interest
charges. Pay off the highest interest rate debt first and continue
to the next highest until you have paid off all unsecured debt
or depleted the money.
- Review financial goals. You have a golden
opportunity to use your windfall to reach some of your financial
goals. Whether short-term or long-term, consider putting aside
some of the money toward college tuition, retirement or other
goals.
- Give yourself some time if you decide
to spend the money. For those who do have an emergency savings
account and do not have large amounts of high interest debt, you
may wish to spend your windfall. Before you do, make certain you
have covered any other financial obligations and give yourself
a time frame that you will wait before purchasing anything. My
advice is to write down the things that you would like to purchase.
Have some fun and create a wish list. Then once you have it all
written down take a look at what would be realistic and wait until
your prescribed time frame is up. If you still want to spend the
money, go ahead.
For your specific situation, Gloria, it may be the
best use of your settlement to pay down your $30,000 in credit card
debt. At the average annual percentage rate of nearly 14 percent
you are potentially spending $4,200 in interest charges per year.
I would encourage you to make sure you have an adequate
savings cushion and then begin paying down your debt. Good luck!
The Debt Adviser, Steve Bucci,
is the president of Consumer Credit Counseling Service of Southern
New England. Visit CCCS
for additional debt
advice or click
here to ask a debt question.
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