What to do with a lump sum of cash

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Q. I’ve just won a $50,000 settlement. I only have $10,000 in my emergency fund but I was thinking I could use the money to jump start a 529 plan for my four-year-old daughter. What do you think?
— Debating

A. Congratulations on the settlement, and we’re glad to know you’re not just running out on a shopping spree.

Putting money away in a tax-advantaged plan to pay for college is never a bad idea, said Nicholas Pontilena, a certified financial planner with Primary Financial in Fairfield.

But first, he said, you should consider your overall picture before committing the entire settlement amount towards that single goal.

Looking at an emergency fund, $10,000 may be a bit light, Pontilena said.

“I usually advise clients to have at least six months of both fixed and variable expenses in such an account to be safe,” he said.

Pontilena said another important point is that there are loans for college but there are no loans for retirement.

“Wanting to save for your four-year-old daughter’s future education is wonderful and I would advise you to open a 529 plan and start funding it on a monthly basis, but I would also advise you to take a serious look at what you are doing for your own retirement and make sure you are on track before committing all of the money to the 529,” he said.

You might consider a compromise: put some into the emergency fund, use some to start a 529 plan and then set it up for a monthly contribution, and then fund an existing or new retirement account for yourself, Pontilena said.

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This post was first published in July 2016.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.