I won USD 50K! Now what should I do with it?

Question

I won a sweepstakes and will be getting USD 50k...it is verified that it is legitimate although no taxes have been taken out so I will have to claim this income on my taxes next year, they will send a 1099. I do have a significant amount of student loans (a little greater than 50k) & I am currently in school now (through a scholarship) finishing my degree so I am not paying towards the principal right now only small interest payments. I also have credit card debt (under 10k) and a car loan (around 15k)—recently my income increased, for the last 3 years I made around $25.00/hour and prior to that I made around $13.00/hour, which is how I incurred the credit card debt. I am wondering if it would be wise to invest this money into a business or real estate after paying off my credit card debt.

I am 30 years old, live in Indiana, a single parent with three children, I work full time, and go to school online. I make a decent amount of money now US$50.00/hr & work 36 hours a week, I am renting US$1040/month, plus have credit cards and car payment (5.5% interest). I have a 401(k) with about $15,000.00 in it and a regular savings account with around $2,000.00 in it. I just recently started making $50.00 an hour & I realize with my job earnings I could get out of debt in a fairly reasonable amount of time depending on how aggressive I pay. I also know the USD 50k won't get me out of debt completely either, so I thought paying the high interest credit cards off and then investing the remainder into starting a business or a property might be the best idea to create another stream of income...(?) I had no intention of quitting my full time job. I just wanted to possibly gain insight to other options outside of throwing all of the money to debt or wasting it all.

Answer 1

EDITED after OP added more details.

no taxes have been taken out yet.

24% will probably be withheld, taking you down to 38K.

The organization that ran the sweepstakes must withhold 24%. It's the law, and of course you have to claim it on your tax return, whether or not they withhold anything. Because they'll withhold, they'll send you a W-2G saying how much they withheld, and you'll put that + the $50K in your tax return.

But if for some reason they don't withhold 24%, you should "self-withhold". And pay quarterly taxes, so you don't get fined by the IRS.

so I thought paying the high interest credit cards off

The stunningly high interest rate on credit card debt lights your hair on fire, and dousing the fire on your head is naturally of prime importance. Thus, yes, paying that off it the top priority.

and then investing the remainder into starting a business

What business?

or a property

Do you have the will to become a landlord, and all the headaches (taxes, repairs, maintenance, trying to evict unruly tenants that know how to game the system, etc.) that come along with it? (Remember that hiring a property manager cuts into your profit.)

might be the best idea to create another stream of income that can then be used to get out of debt...?

Let me play devil's advocate:

• Do you have the entrepreneurial spirit and an existing solid plan, or does it just sound cool and inspirational?
• Since most small businesses fail, what will you do when you fail and wind up in even deeper debt?

IMO, you should:

1. pay off the credit card debt,
2. Add another $1,000 to your emergency fund,
3. EDIT from @Falco comment which I like: Have some fun with a few thousand dollars.
4. pay off as much of the student loan debt as possible (being careful about prepayment penalties, etc.) use the rest for tuition so that you don't accumulate more student loan debt,
5. add the monthly money you were paying towards the credit card debt to your student loan debt payments auto loan payments, and
6. learn where your money goes, so that you don't add any more debt,
7. build up your e-fund to higher levels.

Answer 2

You make $50/hr and are in debt? This is a serious problem!

The $50K is a distraction.

This is what I'd do:

1. Pay off any high-interest debts (say 7% and above) up to ~$40k (saving some for taxes, ignore if they're already withheld).
2. Stick remainder in a High Yield savings account (e.g. Ally) and forget about it.
3. Discontinue use of credit cards, if you're carrying a balance then they're not safe for you to use.
4. Take this opportunity to learn about budgeting and money management.

Answer 3

Not sure if I've read properly, but 50k is not all that much, even moreso as existing debt is involved (was it maybe 500k, and I misread?). Insofar, the mere idea "Should I buy property or start a business or something" makes me go "WTF?!", sorry.

Debt, especially debt with high interest rates (credit cards?) eats away your assets, and it does that constantly, every month. So, the only reasonable thing to do when one has debt and useless money lying around is to eliminate the debt. Debt gone, regular drain of money gone.

Unless of course, you have a secret master plan which will, without risk, allow you to gain higher interest than the one you have to pay for your credit cards. If you have such a plan, please tell me! Count me in.

Interest, generally, gets better the higher the risk. Worded differently, the only ones who will pay interesting interest are those whom you actually don't want to give your money (in fear you will not get it back). They wouldn't pay that interest if they hadn't to. The same goes for investments of virtually every kind. No risk, no revenue.

So, making a better bargain than what you have to pay to your bank is... hard, and risky. Why do that if you can eliminate the steady drain of money by paying off debt? Not losing money every month is, finally, the same as gaining money every month. Only just, no risk.

Also, 50k minus tax, minus small change, is, well, not precisely nothing, but in terms of "let's buy property"... I mean, what do you expect to buy from that? Maybe you can get some desolate shack in some desolate place somewhere, but something that has a fair chance of actually being worth its money and bringing back significant money? Not sure. It depends on where you live, but where I live, that would be a ridiculous idea.
Unless of course, you're willing to take up significantly more debt, which will mean even more monthly expenses. Sure, if the property is rented, you can cover these expenses from the rent. But if you fail to find a tenant, or if you tenant turns out being a hobo who doesn't pay, well, you still have to pay the interest, or the bank will just take away your property. There we go again, risk.

Answer 4

Starting a business isn't really a viable option for getting out of debt, unless you really know the ins and outs of whatever business you'd get into. Most new businesses fail. Even the successful ones will probably require a long slog before turning the corner to profitability.

Your first priority*, of course, is to pay off the high-interest credit card debt. After that, you should look at putting some money in an IRA, just to ease the tax burden.

Since you say you're in school, I'm assuming you're not yet making payments on the student loans. If you are, look at the interest rates, and how they compare with long-term investment returns.

But in general, you should invest the rest, other than a couple of thousand kept as an emergency fund. Depending on how likely you are to need the money in the near future, your choices range between index funds (if you likely won't need it soon) and stable value funds.

*After Uncle Sam takes his cut. That might be taken out by the people who run the sweepstakes. If not, you need to look into estimated taxes.

Answer 5

I think it's worth emphasizing @thehole's excellent comment in an answer that will remain... Scams are much more common than actual sweepstakes! Be certain you're actually winning something for real before spending/counting on any of it. The consumer bureau of the state this sweepstake comes from should be of some help in verifying their legitimacy.

If you get any sort of request for money in order to collect your winnings, please heed that big red flag. A legitimate prize will not ask for taxes, handling, good faith deposit, any sort of fee! Or possibly even worse, details of your bank account (including password) so they can do an automatic deposit.. Talk to your local police department, check out the helpful FBI Internet fraud resources https://www.fbi.gov/scams-and-safety/common-fraud-schemes/internet-fraud don't just fall for something because you need the money

Answer 6

Overall I like Damon's answer, but I'd like to suggest an option taking it further. Absolutely spend all of the money paying off debt.

You have a choice between paying off high-interest-rate unsecured debt that can be discharged in bankruptcy, and low-interest-rate debt that can't. From a numbers perspective, the credit card debt is the better choice to pay off, and you'd only choose the student loans if you think you have a significant risk of needing to exercise bankruptcy rights.

However, in your case, you're considering blowing $50k on gambling (which is what "start a business or buy property" is when you already have that much debt and not much money relative to what it takes to start a business). This suggests a level of financial unawareness and irrational risk-taking whereby I'd seriously consider getting rid of as much of the student debt as possible, which can't be eliminated in bankruptcy, as the priority.

Answer 7

Pay off loans, highest interest rate ones first.

And get a plan in place, a SERIOUS plan, to reduce spending and get rid of the other loans.

Analyse what all you're spending your income on, and cut it down to the bare basics, using anything left over after that to pay off the rest of your loans.

When you're done with that, put half of what you have left over into savings accounts and have some fun with the rest (or use it as discretionary spending for unforeseen expenses).

Investing money, buying property, things like that are NOT what you should ever consider if you've loans outstanding.

Answer 8

First pay off any debt you have.

Find a financial advisor and put it in an index fund that has decent growth and don't touch it until retirement. Some funds can get in the range of 8 to 10% with minimal fees. Lets suppose you put down 30K in a fund: 8% per year (average) would get you 200K in 25 years, and a fund with 10% would get you 325K. This is with no contributions.

I have found that there is no equal with the time value of money, while I don't have much now, I hope to in the future.

Answer 9

I agree with most -- perhaps all -- of the advice already given, but one point has not been raised, by either the OP or any of the answers.

What are your career prospects? You have just gone from $25/hour to $50/hour -- a handsome raise. You must have done a lot of things right, from the point of view of your employer. If you concentrate on your current career, what do you see happening? Obviously, you are unlikely to get another 100% raise soon, but it is also unlikely that you have hit an indefinite plateau at $100,000 per year.

My advice, in addition to paying off the high-interest loans and allowing yourself a bit of fun, is to work hard at your current career instead of diluting your efforts with a start-up business or real estate. The only thing that might change that advice is if you already know a lot about the business you are contemplating and also about running a business. But that doesn't seem to be the case, from reading your question.

Answer 10

Typically what I would do is pay down quite a bit of the debt with half of the windfall, so 25-30K immediately used on the debt.

Then use the remaining amount to just extend my runway a bit more, amplifying the monthly payments I make on the debt. In the US I can extend my tax payment due date till October of the following year, giving a max of 20 months to figure something out.

Most of my debt would be for non-consumptive purchases, so business spending, therefore the interest is also deductible. There is no way for an outside observer to differentiate between irresponsible debt and a calculated risk that involves debt, invalidating many of the answers here. Deductible interest payments completely changes the calculus for what needs to be done, in what order.

For example, if you used all of the money on paying as much of the debt as you can, just to "pay off higher interest debt first", now you are in debt to the government for taxes, and you still have debt incurring interest. This is a worse situation than the one you were in before. On the contrary, if you "extend and pretend", where you extend the real due date of social and reputation problems associated with high debt and potential default, while pretending everything is going to be okay, you get the benefits of: deducting so much interest (if applicable) that there is no tax on the winnings, having a potentially higher salary from your career growth over time letting you pay it off faster anyway, and maintaining your relationships with lenders.

With some of the debt paid down, you could also be eligible for additional credit that would allow refinancing to lower interest debt, and also lowering your utilization, increasing your social standing.