Receiving a personal injury settlement can be a massive relief after being injured in an accident. After months, possibly years, of waiting — much of it likely spent in pain and unable to work — you finally get the compensation you deserve.
But before you splash the cash, you should think about the future. Managing your settlement effectively means it’ll last.
The Basics of Personal Injury Settlements
A personal injury settlement is a type of compensation that covers expenses such as medical bills, lost wages, and pain and suffering after an accident — and it can be significant.
While every case is unique, it’s not uncommon for an accident victim to receive a five-figure payout for an injury that leaves them with some weakness but otherwise doesn’t have a life-changing impact.
Those who can’t work again, have a permanent injury or need life-long treatment may receive six figures or more.
Common Pitfalls to Avoid When Managing Your Settlement
Once you’ve signed all the paperwork and your personal injury lawyer has deducted their well-earned fees and deposited the money in your bank account, you might not know what to do with it.
On the other end of the scale, you might entertain big ideas about taking a once-in-a-lifetime vacation. But before you do, it’s wise to be aware of the common pitfalls you can fall into and the long-term considerations you should make.
The big four are:
Mismanaging funds: It’s crucial to plan how to use your award and stick to it. Impulsive purchases and overspending can deplete your settlement quickly.
Failing to plan for taxes: The Internal Revenue Service (IRS) does not include personal injury damages in gross income, so you won’t have to pay tax on your settlement. However, if you’ve won your case at trial and received punitive damages, you must report them.
Taking on too much debt: You may have prior debt or have taken on debt to make ends meet while awaiting your settlement. While it’s important to prioritize debt repayment, you don’t want to leave yourself financially vulnerable.
Not considering future expenses: When managing your settlement funds, you should consider your future expenses and plan accordingly. These can include ongoing medical care, bills incurred while recovering from a necessary surgery, and changes to your earning potential. Don’t forget that the cost of living can increase over time, so you should also factor in the impact of inflation.
Strategies for Effective Settlement Management
When it comes to managing your settlement the right way, here are some strategies to consider.
Create a Budget
Budgeting is valuable for everyone, but it’s especially vital when you suddenly receive a significant amount of money. It’s easy to lose sight of how much you’ve spent — a little treat here, a little treat there, and before you know it, you’ve frittered it all away.
A budget helps you track your spending and avoid wasting your valuable funds. Start by calculating your monthly expenses and any foreseeable costs.
Be liberal here but stay within your set budget. Then, if you’ve overestimated your costs, you’ll have a little left over.
Manage Debt
If you have existing debt, such as credit card balances or medical bills, you should prioritize paying it off using your settlement.
This will help reduce your overall financial burden and free up more funds for long-term expenses. Remember the caveat, though: you shouldn’t take on more debt than is realistic for your situation.
Build an Emergency Fund
A rainy day fund is invaluable if you face unexpected expenses or hardship. Your partner may lose their job, or your four-legged friend might need an emergency trip to the veterinarian, so consider setting aside a portion of your settlement to give you a safety net.
Work with a Financial Advisor
A financial advisor can help you develop a plan to effectively manage your funds and provide personalized guidance as your financial situation evolves.
What to Spend Your Settlement On
While it can be tempting to splash the cash when your settlement comes through, remember that it’s designed to cover your long-term costs.
Don’t forget to set aside enough money for any home modifications you may need to support your independence as well as ongoing medical expenses — such as medication, doctor’s appointments, and physical therapy.
You also might consider spending your settlement on:
Education and training: If you can no longer perform your previous job role because of your injuries, you may want to invest in education and training so you can learn a new skill or gain a new qualification and improve your earning potential. Alternatively, you might decide to put some money toward building your own business.
Debt repayment: Using a percentage of your windfall to pay off outstanding debt can take a weight off your shoulders and provide greater long-term stability.
Family: If you have children, you may want to set aside a portion of your settlement to put in a college, home, or car fund.
Investments: Maintaining a diversified portfolio can make your money go even further. However, it’s vital to understand the risks and seek independent financial advice before investing.
Vacations, leisure activities, and a well-earned treat: The personal injury process can be long, tiresome, and difficult, so securing the compensation you’re entitled to calls for a celebration.
That might look like a weekend away, a big dinner for the entire family, or the latest gadget. Just account for it in your budget — you don’t want to worry about paying for it later.
A personal injury settlement can provide much-needed financial relief. If you prioritize responsible spending and plan for future expenses, you’ll feel confident about making it last over the long term.
