Most people think about their settlement check after their personal injury case is settled, but the time to start thinking about your settlement check is soon after you’re injured in an accident.
The first thing to think about is don’t tell your family and friends anything about what you are doing with regard to a lawsuit. I’ll explain why later in this article.
For most people injured in an accident, the first time they will see a large sum of money is from a personal injury settlement. Because money from a personal injury settlement is usually tax-free, a $1,500,000 settlement that gives you $1,000,000 after legal fees or a $750,000 settlement that gives you $500,000 after legal fees is a lot of money to get all at once.
When you’re earning $60,000 or even $150,000 per year before income taxes, your tax-free settlement seems like free money you can spend on whatever you want.
Don’t Spend Your Settlement Money
We have had clients who spent their entire $1,000,0000 personal injury settlement money in a short time. It’s amazing how fast a lump sum of money can disappear between buying a few things and some good-meaning friends and relatives.
One of the important things that most people don’t know about spending money is what it costs to keep the item you buy.
Buy a boat for $500,000, and you’ll find it will cost you 15% or $75,000 per year to keep it. I know. I had a 37ft sailboat.
You might want to buy a fancy sports car, but you must consider how much you will spend on insurance, parking, maintenance, repairs, and depreciation. If you get a loan, so you can spend more of your settlement money on other things, you must also consider the interest cost.
According to AAA, “the average yearly cost to own and operate a new vehicle in 2022 is $10,728, or $894 per month.” Costs and interest are considerably higher now.
When You Get a Personal Injury Settlement, You’ll Have a Lot of Friends
When you get a personal injury settlement, friends and relatives come out of the woodwork.
They will all need just a little money and will swear they will pay you back. Since you didn’t own a bank, why start one now?
If you loan money to a friend or relative, you should give them the money as a gift because you will never get it back, and your relationship will be over.
We recommend that you don’t tell anyone about your personal injury settlement, not even your kids or your parents. If they ask, just tell them your personal injury settlement was deposited in a trust, and you can’t withdraw money from it.
We have one client who lost her entire $1,000,0000 settlement within an hour of getting her check because she didn’t listen to us. Her son needed money for his successful business, but she fell for a scam by the CFO of his business. The CFO disappeared with all of her money, and she never saw it again.
How Long Does It Take To Spend Your Personal Injury Settlement Money?
How long does it take to spend your personal injury settlement money until it’s gone and you’re back to where you were before your settlement?
We estimate, on average, personal injury clients who don’t invest their settlement money spend all of it in 1-3 years.
So, how can you keep your settlement money and still live the life you want? Keep reading below.
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See how Nyda got a new house! What will you do with your settlement money?
The Secret of How the Rich Get Rich
The secret the rich have to get rich and stay rich is to conserve capital (money and assets).
Instead of spending money, the rich invest money in things (financial vehicles) that will keep their money safe and make more money they can reinvest or spend.
The Secret to Using Your Settlement Money to Get Rich
Instead of spending your settlement money, which can be spent rather quickly, leaving you poor again, invest your settlement money to save money and build wealth or provide an income.
While you’re trying to decide how to invest your personal injury settlement, deposit your money in a safe account where it’s earning interest and is liquid so it’s instantly available when you decide what you want to do.
There are online savings accounts that are FDIC insured that pay significantly more interest than physical walk-in banks. You can open a mutual fund invested in U.S. debt at Vanguard, which is currently paying 5.04%, of which approximately half of the interest earned is partially tax-free for New York residents.
$500,000 deposited in that fund is currently paying interest of $25,200 annually. That’s $2,071 per month you can spend, and you still have your $500,000.
Use Your Settlement Money to Buy a House or Apartment
We have had clients who listened to us and invested their settlement money in a house or commercial real estate. They have done very well with their investment, while some other clients blew through their settlement money quickly.
Investing in real estate, whether you buy a house or apartment to live in or for rental income, is probably the best investment for personal injury clients.
Our clients usually are not knowledgeable about the stock market and do not have the patience to stick it out when the stock market is not doing well.
Use Your Settlement Money to Buy a House or Apartment to Live
When you use your settlement money instead of a mortgage to buy a house, townhouse, or apartment to live in, you’ll save a lot of money in rent. Rent increases forever, and when you get older and can’t work, you won’t be able to pay rent.
You can buy an apartment for all cash with your settlement money and live rent-free. Many of our personal injury settlements are enough to buy a house or apartment in New York. In fact, several of our clients have bought a house or apartment in New York.
But you can buy a house or apartment outside of New York for a lot less money, and several of our clients have done that.
I’ve been looking to buy an apartment on the beach in South East Florida, from Miami to north of Boca. I’m looking for a place to spend a month or two around January-February. But your personal injury settlement can let you live all year long in a gorgeous oceanfront apartment.
I’ve been looking at two-three bedroom apartments with a direct ocean view, but many of our personal injury clients get enough settlement money to buy a two-bedroom apartment with a partial ocean view. I’ve seen many of these apartments sell for $400,000-$600,000. Facing inland but still on the beach or across the street, they can be even cheaper with low fees and taxes.
Use Your Settlement Money to Buy a House or Apartment for Investment
You can buy an apartment with the settlement money from your personal injury case and rent the apartment.
There are four ways you can make money from using your settlement money to invest in a house or apartment:
- If you rent a fully paid apartment, you’ll get instant cash flow with monthly rental income.
- You’ll get the potential appreciation in the value of the property value over the years in which you own it.
- If you make enough of a down payment to create a positive cash flow, you will get monthly rental income while your tenant pays off your mortgage, and your apartment appreciates in value.
- There are substantial tax benefits when investing in rental properties.
If you’re interested in using your personal injury settlement money to invest in rental property, you may want to download a rental property analysis spreadsheet from Stessa.com.
You can also find interesting articles about rental property investments and free rental property management software at Stessa.com.
Some of Our Clients Who Bought a House With Their Settlement Money
Nyda Bought a Townhouse on the Hudson River With Amazing Views
Nyda used her personal injury settlement money to buy this townhouse condo in Westchester, NY, on the Hudson River with amazing views.
These are the amazing views of the Hudson River from the back windows and balcony of her house.
Steve Bought a Commercial Building in Long Island City, Queens
When Steve’s personal injury case was settled, he complained to me that his landlord raised the rent for his business. I told him to fire his landlord and buy a building with his settlement money.
Steve bought a commercial building in Long Island City, Queens, NY. He’s now retired, and he rented his building. He gets a nice check every month for a building that is worth several times more than he paid. Now he spends summers on Long Island and winters in a house he bought in Florida.
John Bought a House in Rockland
John V. had a car accident. When I met John, he told me that he had a lawyer who wanted to settle his case for $75,000 and that there was a $300,000 insurance policy. He asked me what I thought, and I told him I could get him the entire $300,000.
After I took over his case, I settled it for $310,000. John bought a house in Rockland County with his money.
Kevin Bought a House in Suffolk
Kevin had a torn meniscus in his knee. He bought a house in Suffolk County, Long Island, after a jury trial verdict of $465,000.
Rich Bought a House in Suffolk
Another client got a jury trial verdict of $1,000,000 and bought a house in Suffolk County, Long Island.
Donna Bought a Brand New House
After Donna’s motorcycle accident, we got her teeth fixed, and after her settlement, she bought a brand-new house in South Carolina. Donna thinks we’re the best motorcycle accident lawyers in New York.
Can You Buy a House With Your Settlement Money?
Many of our clients get enough money from their settlement to pay for a house without a mortgage. If you have one of these injuries from an accident, you may also be able to buy a house.
Don’t forget. Personal injury settlements are almost always income tax-free.
See some examples of personal injury cases we settled to get an estimate of how much money you could get from your personal injury settlement.
Invest Your Settlement Money in the Stock Market
If you don’t want to invest your settlement in a house, you can invest it in the stock market or a mutual fund. Just do it wisely.
Things to keep in mind about investing your settlement in the stock market:
- The stock market should only be used if you can keep your money invested for up to 12 years because the stock market may go down and take a few years to go back up.
- Only invest in major companies. I like tech companies because I think the future will be based on tech and Artificial Intelligence. One of my favorite companies is Microsoft because it is a highly successful tech company, and its stock pays a small dividend. I also like Meta and Tesla. All three of these companies are heavily invested in Artificial Intelligence.
You can start learning about stocks and mutual funds at Schwab and Vanguard.
Should You Invest Your Settlement Money All at Once?
A Northwestern Mutual study found that a lump-sum investment outperformed dollar cost averaging 75% of the time. Dollar-cost averaging is when you buy shares of stock in small amounts at regular intervals, regardless of price, so you get an average price.
A structured settlement is great for people who will get a large personal injury settlement because you won’t have to learn anything about investing or managing your investment. You’ll just get a check every month for life if that’s what you want.
If you plan on investing your settlement in a mutual fund, you may instead decide to do a structured settlement. A structured settlement invests your settlement in an annuity that pays you an amount every month.
Structured settlement payments can be for a certain number of years or for life and can increase monthly payments to compensate for inflation. There are many ways that a structured settlement can be designed, but that is a topic for another article.
The advantage of a structured settlement is that the interest you earn is income tax-free to you because it becomes part of your personal injury settlement.
Be aware that a structured settlement must be set up by your personal injury lawyer before you sign a personal injury settlement release. Your lawyer must deposit your settlement check in the trust.
You cannot deposit your settlement check in your account and then deposit the money in a trust because interest earned on money deposited in your bank account is taxable. If you deposit your settlement check in your account, you cannot give it back to your lawyer to deposit in a trust.
Is It Safe to Deposit a Settlement Check?
It is not safe for you to deposit your settlement check if:
- Your health insurance paid for your medical treatment, and your health insurance plan is an ERISA plan or an ERISA-regulated plan. If you get health insurance from an employer that has 50 or more employees, you likely have an ERISA plan or an ERISA-regulated plan. Your health insurance will have a lien on your settlement, and your lawyer must resolve it before you deposit your settlement check.
- You receive public benefits. You will have a lien on your settlement, and your lawyer must resolve it or deposit your settlement check in a trust. You cannot deposit your settlement check.
Should You Spend or Invest Your Settlement Money?
Some considerations to determine whether you should spend or invest your settlement money:
- Your age.
- Whether you want to invest your settlement money for income or a house or apartment to live in.
- Whether you are receiving public benefits, such as Medicaid, SNAP (food stamps), or housing.
- Whether you want to leave your money for someone else.
- The amount of your personal injury settlement.
If you’re younger, you should strongly consider investing your settlement money in real estate or the stock market.
If you estimate your life span is less than 20 years, you might consider spending your settlement money while you can enjoy it. But if you want to leave your money for a relative, you can buy a house and leave the house for your relative or invest your money, spend the income and maybe some of the principal, leaving the remainder for your relative.
If you receive public benefits and your settlement is less than $30,000, you can have your lawyer deposit your settlement into a Pool Trust from which you can spend it without losing your public benefits.
Your lawyer can deposit a settlement check of any amount into a Pool Trust, but it is more difficult for you to spend your money from a Pool Trust than a Special Needs Trust. A Pool Trust can be opened for a few hundred dollars, while a Special Needs Trust can cost several thousand dollars.
If you receive public benefits and you receive a large settlement, you can either decide to stop receiving public benefits and invest your settlement or have your lawyer deposit your settlement into a Special Needs Trust from which you can spend it without losing your public benefits.
Money in a Special Needs Trust can be spent and/or invested. Your Special Needs Trust can invest in stocks or own an apartment or house.
If you receive a large settlement and you have enough years to invest the money, you should decide how to invest it and not spend it.
Should You Use a Settlement Check to Pay off Credit Cards?
A quick search on Google shows that many lawyers recommend that you use your settlement check to pay off credit cards and other debt. But will paying credit cards, high-interest loans, or other bills really get you financial freedom?
When I started my personal injury law practice, I was cleaning up credit reports for doctors and stock brokers who are high-income earners. Deciding what to do, requires information about your personal situation, so it’s not something that can be answered on a website. A blanket statement advising you to use your settlement check to pay off credit cards and other debt is wrong.
Before you plan to pay off debt and before you get your settlement check, you should discuss this with a lawyer or accountant. You may be able to get rid of your debt or settle it for a small amount.
Please note that I cannot provide a consultation regarding your settlement check if your case is being handled by another lawyer.
Where to Get Advice About Your Settlement Money
You should discuss any settlement with your personal injury lawyer before you sign a release, especially if you are receiving or ever received public benefits.
If you will receive a gross personal injury settlement of $100,000 or more, you should find an accountant to consult with. In New York, a gross personal injury settlement of $100,000 should give you $66,666.66 after legal fees are deducted and before case expenses, medical liens, and public benefits liens are deducted. Use our calculator to find out how much money you will get from a personal injury settlement.
We can recommend an accountant and a real estate attorney in New York.
Please note that I cannot provide a consultation regarding your settlement check if your case is being handled by another lawyer.
When to Get Advice About Your Settlement Money
Be aware that a trust or a structured settlement must be set up by your personal injury lawyer prior to you signing a release.
If you receive public benefits, you must discuss your settlement with your personal injury lawyer before you sign a release. Do not deposit your settlement check unless you discussed your public benefits with your personal injury lawyer.
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Philip L. Franckel, Esq. is one of the HURT911® Dream Team™ Founding Partners at 1-800-HURT-911® New York; He has a 10 Avvo rating; Avvo Client’s Choice with all 5-star reviews; Avvo Top Contributor; and a former Member of the Board of Directors of the New York State Trial Lawyers Association.
Robert Plevy, Esq. is one of the HURT911® Dream Team™ Founding Partners at 1-800-HURT-911® New York. Rob began his legal career in 1993 as an Assistant Corporation Counsel defending The City of New York against personal injury lawsuits.