We Might Win $100,000. What Should We Do With It?

Question: My husband is now part of a class-action lawsuit. It looks like he’ll win around $100,000. He wants to use it to buy a $92,000 condo near us and then spend $8,000 fixing it up so we can rent it.

He says this way, we can make much more than $100,000. I want to use the money to pay off our mortgage and maybe even our credit cards, since we have around $10,000, I think, on five or six cards.

My husband says this is short-sighted, and that every rich person has debt, and that wealth is simply juggling your debts. We’re at loggerheads. What do you think? 

— Marilyn in Lousiana

Howard Dvorkin CPA answers…

If you really want to know what I think, Marilyn, here it is. You both need to take a deep breath and consider what you’re proposing.

Here are the troubling signs I see from your email…

• Lawsuit settlements are often taxable. This being taxes, it get complicated. For instance, if the settlement includes money for “pain and suffering,” that’s not usually taxed because the IRS might consider it a reimbursement for your injuries. However, the point is: You need to ask before you count on the money.
• Lawsuits are rarely slam dunks. Right up to the end, not only can the verdict change, but so can the terms. I’m concerned that you might be counting your settlement before it’s sealed.
• Credit card debt is one figure you can know for sure. You say you “think” you’re carrying $10,000 on “five or six” credit cards. Before you decide what to do with new money, you need to be sure what’s happened to your old money — right down to the penny.

For the purposes of illustration and education, let’s assume you get a cool $100,000.  If the condo costs $92,000, I’m assuming your husband hasn’t factored in closing costs, insurance, and other expenses. Just selling a home can add $15,000 in hidden fees. Even if buying this condo is half that, you’re already over budget if you need to make $8,000 in renovations.

Now let’s turn to paying down your existing mortgage. You don’t mention what your interest rate is, but let’s assume it’s 5 percent. You also don’t mention what the interest rates are on your credit cards, but the national average right now is hovering around 15 percent.

I’m sure you see where I’m going with this. Paying off your credit cards will save you around 10 percent more than paying off your mortgage. If you really want to know what I think, Marilyn, I suggest paying off your credit cards with whatever money you may be awarded.

Next, I’d make sure I had at least three months of living expenses in an emergency fund. If hurricanes Harvey and Irma have taught us anything, it’s that a natural disaster can cost a lot of money.

Finally, with whatever settlement money is left, I would look at other debts I have: an auto loan, student loans, personal loans. These I would pay off from highest interest rate to lowest. Finally, I might indeed pay down some of the mortgage.

Whatever you do, Marilyn, I urge you to gather facts and make dispassionate decisions with your husband. Facts like I’ve outlined here can help avoid a fight over this windfall — if it becomes a reality.

Even if it doesn’t, you can use this experience to still do the things I’ve outlined here.