One of the sweetest surprises in life is getting a sudden and unexpected amount of money. This could be a salary bonus, an inheritance, a property sale, or even winnings from Kaun Banega Crorepati. The windfall could be a few thousand rupees, or it could be more than you'd earn in a lifetime. However, the kick you get is undeniable. For a short while after, the air smells like champagne and roses, and you look for an excuse to party. And so you should.
But after that, you need to start planning what to do with the stash—and the options are many. You could pay off your loans, take that dream vacation, or put it all in the bank. But don't forget that the best thing about a windfall is that it allows you to prolong your celebration for a long time, provided you allow it to grow over time. Here are some ways in which you can utilize your surplus cash effectively.
First, plan the party: Life is too short to be spent squirreling away every penny. Enjoy the fruits of your windfall with the people you care with. Get that out of your system first. But be careful whom you share your joy with, lest unscrupulous "friends" and "relatives" come crawling out of the woodwork to separate you from your money.
Figure out the tax obligations: Different kinds of windfalls have different tax implications. For instance, income on sale of inherited immovable property (e.g. a house) attracts capital gains tax. To offset this tax, you might need to put some money into tax-saving instruments. Calculate those obligations right away, so that you know exactly what kind of disposable cash you are left with.
Pay off costly debt: There are two kinds of debt: the kind you take to buy a house or pay for a child's education, and the kind you take on to consistently live beyond your means. Credit card and personal loan interest fall into the second category. Clear off those dues first, and steer clear of them as much as possible.
Set up a contingency fund: Those with large families, aged parents, or small kids need to consider setting up a contingency fund with their windfall gains. If you can afford it, the fund should cover 6 months' worth of expenses—including household expenses, school and tuition fees, medical expenses, EMIs and financial investments. Since you might need to withdraw from this fund at short notice, a liquid/ultra-short term mutual fund would be an ideal investment channel for this contingency fund.
Protect your future: If you, or your loved ones, are currently not fully covered by life and health insurance, this is a perfect time to start. If you own a small business, you can get extra general insurance cover, as needed.
Have a growth plan: Whatever is left after tackling costly debt, setting aside a contingency fund, and protecting your family is your investable amount. Your objective should be to make this sum grow progressively, so that it allows you to celebrate much longer—well into retirement, if possible. Stock market investments, either directly or through the mutual fund route, can help your savings grow at an accelerated rate as compared to bank deposits or bonds. So become a savvy investor, and continue enjoying your windfall gains for a long time to come.
No matter how small or substantial, a windfall gain is an opportunity to build your wealth at a faster pace. And mutual funds can be a key ally in your journey to financial freedom. The recent 'Mutual Fund Sahi Hai' campaign by The Association of Mutual Funds in India (AMFI) seeks to educate investors about the advantages and misconceptions prevailing around mutual funds in India.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
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