Settlement amounts to good fortune

By Dave Ramsey

Published: August 4, 2008

DEAR DAVE • Recently, I had an accident at work and lost a couple of fingers. I was given a one-time settlement of $500,000. I've gotten another job since. My wife and I are both in our 30s, and we've got our eye on a house that appraised for $50,000. The seller is willing to take $38,000. We've also got three children and about $12,000 in credit-card debt. What's the smartest way to handle this money?

Kevin

DEAR KEVIN • I'm glad you're determined to manage this money well. I'm sorry, too, that you suffered an injury like that.

Here's the plan. First, take $15,000 and set up an emergency fund in a good money market account. Life happens, and you need to be prepared. Do not touch this money except in the event of a real emergency! Next, write a check for $12,000 and get those credit sharks out of your life forever. Then, if you two are sure that house is the one you want, I say go for it and pay cash. Did you see what happened? With just $65,000 of that money you became debt-free, you own your home and you have a fat emergency fund in place. How cool is that?

Retirement comes next. You don't want to work forever, so 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 — one for each of your children. This will take about $25,000 over the next two years.

Now, it's time to have some real fun. You've been through a lot, so take $10,000 and just blow it. Spoil yourself and your family a little bit. You deserve it after what has happened to you.

And last, find a mutual fund broker with the heart of a teacher and invest the remaining money across four types of mutual funds: growth, growth and income, aggressive growth and international.

If you do this, Kevin, you'll retire a wealthy man. By the time you're 65, you'll have millions of dollars on your hands! You'll be able to live like no one else and give like no one else.

This horrible accident can be turned into a blessing — one that will affect your family and your community in great ways for years to come.

DEAR DAVE • I have $2,500 in credit-card debt. I'm thinking about transferring the balance from my current card to another one with a much lower interest rate. Is that good?

Trevor

DEAR TREVOR • A lower interest rate will help you save a little money. But the problem is that it also can make you feel like you've addressed your problem with debt when you really haven't. Keep in mind, too, that most of those low-interest or no-interest credit card offers are good for only a short period. There's always a catch!

Emotion is a key element to getting out of debt and staying out of debt. You've got to get steaming mad at debt and attack it with a vengeance. Really let it sink in and think about how many times this debt has negatively affected your life. Think about all the important stuff, all the great stuff, all the fun stuff you could have done with that money instead of sending it to those bozos at the credit-card company.

Here's some great news: You can sell some stuff or take on an extra job for a little while and wipe out that debt in less than a year by making $250 payments every month!

Lots of people make the switch to low-interest-rate credit cards. But you've got to change the behavior and the mind-set that put you in that situation in the first place.

If you don't take a stand that you'll never borrow money again, you're liable to end up in the same bad situation as before.

E-mail questions to davesays@daveramsey.com. For more financial advice, go online to www.davesays.org or call (888) 227-3223.

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