How should I allocate a large amount of money from a recent legal settlement?
I was recently bit by two dogs. The dog's owner had homeowner's insurance and we settled at $55,000. I'm a 23-year-old female and was recently let go as a marketing manager at a real estate company. I am not currently working. I have a total of $6,000 in various kinds of debt. My rent is $450 per month. My other expenses include car insurance and a cell phone bill. My total recurring expenses are $800 per month. Given this information, how should I allocate this amount of money?
1. Pay-off your debt
2. Keep 1 years worth of monthly expenses in cash.
3. Invest the balance of the funds in a way that is in alignment with your risk-tolerance. Allocation should be driven by you comfort for market volitility and expected need for the money. By setting aside a years worth of living expenses, this will give you time to find a new job. The balance of the assets can than be invested in a way that allows for the risk necessary to grow the money.
Until you’re back at work, you don’t want to become overleveraged. You should pay off the credit card debt immediately, because that will reduce your monthly payments. After that, spend as little as possible while you look for your next job.
Have you been receiving unemployment since getting laid off? If you have money coming in that covers most of your bills, you should be safe to invest around $5,000. Once you’re working again, I’d invest another $10,000 or so (your total investment should be between $15,000 and $25,000, assuming you get back to work sooner than later). Consider putting that money in either a municipal bond, a quality, dividend-paying stock, or some other fund that won't come with too many fees or penalties.
You should also look at how this money can assist you professionally. Is there a course that will help you earn a higher paying position with another company? Can you purchase software that will enable you to work freelance and get back to work right away? Marketing is an excellent and competitive field, and this could be a good opportunity to get ahead. There’s a fine line to walk with a windfall like this; you don’t want to spend money while you’re not generating income, but investing in yourself is usually the best way to increase your future earning potential.
While you think about your next move, try to keep about $45,000 in the bank. Pay off your credit card, invest a small amount if you’re receiving unemployment, and see how quickly you can get back to work.
Kee[ it in the bank...for now.
Your financial situation is unsettled and will remain so indefinitely. There are a lot of other unanswered questions here, but in general, your best strategy is to stay 100% liquid until you get back to work. Pay off credit card debt. If you really get in a jam you can always borrow from them again if needed. In the meantime save the interest cost and lower your cash outflow. Don't pay off the car, you won't be able to refinance it without employment.
If you are reemployed quickly you can look to invest then. Don't assume you are missing out on market gains. In the short run, it is a 50/50 proposition as to whether the market goes up or down. But you may appreciate being liquid too. Is relocating, and the costs associated with moving, a possibility? Or taking a job for less starting pay but bigger long-term payoff? Any chance of starting a business?
When you have settled again, please take $20,000 assuming it is still available and invest in a nice long-term fund or ETF. And forget about it! You'll appreciate the foresight to invest long-term in the future!
Given your unemployment, I would keep the vast majority in cash until you get another job. Once you do, then I think you can explore investing some of it, but until then it doesn't make sense to put any of it at risk as you aren't sure how long you will be unemployed for.
Pay off all of your debt. Put another $5,000 or so into your checking account so you can meet your monthly expenses for six months. If you have health insurance left over from your employer you may have to pay the premiums yourself so if that boosts your monthly nut, reserve more money accordingly. If you have recurring medical issues from your injury then keep more in reserve. But it's a pretty good economy. So spend time reading up on tips for interviewing; take some time to acquire or brush up on job skills; and sit down to work out goals for the next 5-10 years. With all of that done, you should be able to find a good job and get back on your feet.
The other $40-45,000 should go into an investment account to hold good-quality equities for the long term. It's a great start on a lifetime of saving. Once you are employed, resolve to "pay yourself" every month by allocating money to savings at the same time you pay your rent, phone, etc. Live modestly and build your nest egg. I'm sorry for what was most certainly a very alarming episode -- but it could result in a huge positive change for you, if you let it.