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What to do with $500,000 settlement?

Dear Dave,

I used to work in a steel mill, and a few months ago I had an accident and lost two of my fingers. I was a awarded a one-time settlement of $500,000, and I’ve since moved on and gotten another good job. We’ve got our eye on a house that appraised for $50,000, but the seller is willing to take $38,000. We’ve also got three kids and about $12,000 in credit-card debt. What’s the smartest thing to do with the settlement money?

Kevin


Dear Kevin,

I’m really sorry you had to suffer an injury like that. It sounds like you’ve got a good head on your shoulders, though, so here’s the plan – ready?

First, cut a check for $12,000 today and pay off those debts. Then, if you guys are sure it’s the house you want, go ahead and buy it with cash. Do you see what just happened here? With $50,000 you became debt-free and you own your own home. How cool is that?

Next, you need to think about retirement. Fully fund a couple of Roth IRAs for you and your wife for the rest of your lives. Also, max out three Educational Savings Accounts for each of your kids. This will take about $25,000 over the next two years. Don’t forget about an emergency fund, either! Life happens and you need to be prepared. Take $15,000 and set it aside in a money market account, and do not touch this money except in the event of a true emergency.

Here’s the fun part, Kevin. You’ve been through a lot, my man, so take $10,000 of the money and just blow it. Spoil yourself and your family and have some fun. You deserve this after everything that’s happened to you.

At this point you’re left with $400,000. Find a good mutual fund broker, one with the heart of a teacher, and invest this money across four types of mutual funds – growth, growth and income, aggressive growth and international. If you do this, Kevin, you’ll retire a very wealthy man. By the time you’re 65 to 70 you’ll have about $47 million dollars on your hands! You’ll have changed your family tree for generations to come, and you’ll be able to give like you’ve never given before.

This horrible accident can be turned into a blessing – one that can make a huge positive impact on your community and turn you and your wife into Old Man and Old Lady Moneybags!

Dave


Make hubby partner in new business?

Dear Dave,

I’ve started my own business, and the grand opening is Saturday. I’ve done everything so far on a cash-only basis, and my husband has been a huge help along the way. I’m wondering if would be a good idea to officially make him a partner in the business.

Beverly


Dear Beverly,

I’m really proud of the way you’ve done this without going into debt and the fact that you two have been working together to make it happen. Now you have a great situation where you own the business instead of the business owning you.

But no, I wouldn’t make him my partner in this deal. A partnership is probably one of the worst forms of business ownership, especially if the partner is your spouse. It doesn’t accomplish anything, and if things go wrong you’re both standing there liable. If you’re in the type of business where you have some liability and you’re afraid someone might try to come after your personal stuff I’d look into the possibility of a Sub S Corporation.

You guys have done a fabulous job, Beverly. Grow slow and keep up the good work!

Dave


15- or 30-year mortgage … which one?

Dear Dave,

We financed our home on a 30-year mortgage because we couldn’t afford the payments on a 15-year note. Even with this, we’re having trouble saving any money, paying our other debts and keeping up the house payment. Should we move and sell the house?

Larry


Dear Larry,

First of all, if you couldn’t afford the house on a 15-year mortgage, then you couldn’t afford the house. Period.

If you’re rolling along and you can’t get out of debt because you’re house payment is so big it’s strangling you, you’re what’s called “house poor.” This usually happens when your house payment is more than 30-35 percent of your take-home pay. That’s why I recommend you make sure your mortgage payment is no more than about 25 percent of this figure.

But of all the things I tell people to sell or get rid of, the house is almost always the last. Having to give up your home is very draining – financially, spiritually and emotionally. Hold onto your home as long as you can.

Let’s try living on really tight budget for the next six months. Give every dollar a name and spend everything on paper before the start of the month. You may have to cut out cable television and put vacations on hold for a while, too. Then, take a really close look and see if you’re getting out of debt and into savings. If not, then you may have to look at putting that house on the market.

Dave

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