|
Lump Sum Payment - Lump Sump vs. Payments Over Time At some point during your life you may have to decide whether to receive a one-time cash payment or monthly payments over a long duration of time. It could be everything from a retirement account, a particular injury settlement, or maybe you could win the lottery. at the time the situation presents itself, do you know which option is best for you? Unfortunately, it is not as simple as adding up the total monthly payments to see if they are more than the lump sum payment. The combined payments should be significantly more than the single payment as interest is being earned on the dollars if it is not paid out in a lump sum. The best choice for you depends on several factors. 1. What interest could be earned on your dollars if you take a single payment including reinvest? 2. What interest are you earning on the dollars if you receive monthly payments? 3. might you manage your dollars well or could you be tempted to spend it, if you have it all at once? 4. Is the dollars critical to everyday bills, college, retirement, or is it just extra income? 5. Are the monthly payments guaranteed in the event of your death? The first 2 questions should be considered together. If you are able to earn more interest investing the dollars than you are earning by receiving monthly payments, then you should take a lump sum. Evaluate your investment options: Treasury bills including certificates of deposit (CDs) earn fixed income at a lower interest rate while bonds including stocks might give you a higher return with more risk of losing principal including interest. Another very important factor is your dollars management abilities including spending habits. If you are not confident in your dollars management skills you could need to hire a financial planner or professional to help with your lump sum payment. The other option will be to take the payments over time. That way you might spend dollars as you receive it. Keep in mind, the does not mean to go out including rack up credit card bills because you know more payments are coming in. In fact, if you have a hard time managing your money, I will suggest keeping 1 credit card for emergencies including getting rid pertaining to the rest. If the dollars is critical to everyday life, you may need to take the dollars now to help your situation. However, if a steady income is more valuable to you, then the payment stream may be a better option. On the other hand, if you plan on using the dollars for a time in the future, you are probably better off taking the one-time payment including reinvesting the dollars yourself. As a general rule, you might usually earn more interest by taking the dollars up front rather than over time. Finally, you need to know how the payment stream is structured. What happens to the payments if you pass away? Do they continue to a beneficiary or do they stop? The payment guarantees vary greatly so make sure you know the specific terms of any payment stream before you accept one. I hopes the helps make your cash payment option decision a particular easier one.
|