Making the most of a financial windfall

Anand Kalyanaraman
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Fulfil some of your long-held dreams. But don’t overdo it. Regular doses of small comfort can give more happiness than the one king-size shot at luxury.

A financial windfall is a rare event. So, if you are one of the lucky few who inherit substantial wealth unexpectedly or win big in lotteries or game shows, use the fortune judiciously.

Here are some dos and don’ts to ensure that ‘easy come’ does not become ‘easy go’.

Take your time

A sudden inflow of big money can be a heady feeling. This can lead to a false sense of financial invincibility. This in turn may induce bouts of binge spending (flashy cars), unsustainable financial commitments (down-payment on a pricey luxury villa) and misplaced generosity (sponsoring the foreign education of a cousin’s son). Irrational behaviour (quitting the job without thinking it through) and a hedonistic lifestyle (daily partying) may also follow. This way, your wealth will deplete faster than you think and you may soon be borrowing to maintain your new-found lifestyle.

Sure, you have reason enough to be happy with the sudden fortune. Savour the moment, but let it pass without jumping into decisions. After the feeling sinks in, evaluate your options with a cool head.

Have perspective

Don’t exaggerate your fortune. For starters, remember that the taxman will take his cut. This could be a good 30 per cent. So, if you win one crore in Kaun Banega Crorepati, you get to take home around Rs 70 lakh.

Sure, this is still significant. But consider that these days a reasonably-sized apartment in any of our big cities could easily set you back by that much. Having the right perspective will help you keep your head on your shoulders and act rationally.

Be discreet

Don’t tom-tom your good luck to all and sundry. Where there is a will, there are relatives. Where there is sudden wealth, there are seekers.

As far as possible, be discreet about your fortune. Else, you may have to deal with a long queue of friends and relatives who appeal to your generosity.

This could leave you in a tight spot – damned if you give, damned if you don’t. This is not to say that you must be stingy. If you wish to give, decide in advance how much you can realistically spare, pick and choose the needy beneficiaries, and politely refuse the rest.

Unrestrained generosity will quickly erode your fortune.

Pay off costly debt

A windfall is a great opportunity to get your financial house in order. Use the money to first repay high-cost debt such as credit card outstanding and personal loans. These, if left unattended, can balloon and leave you in a debt-trap.

But don’t go overboard. ‘Good debt’ such as housing loans need not necessarily be repaid.

These loans generally have a relatively low rate of interest and enjoy tax-breaks.

If after-tax returns from investing are better than the after-tax cost of the loans, it makes more sense to invest and make the money grow.

Invest wisely

Deploy the chunk of the money in investment avenues which not only improve your standard of living, but also help you provide for your goals – both short-term and long-term.

Discuss with a trusted financial advisor and depending on your age, level of wealth and risk appetite, decide on your investment options.

Use a good mix of fixed income instruments such as bank deposits and bonds which are safer and can provide you regular income, and equity investments which are riskier but have the potential to grow your wealth faster. Investing some portion of the wealth in gold may also be a good idea.

The idea is to build a diversified portfolio which can reduce risks in case some investments do not pay off as expected.

If your after-tax windfall is substantial, you could also explore big-ticket investments such as real estate which can appreciate and provide regular rental income.

But be sure that you do not commit unrealistically or invest recklessly. Cut your cloth according to your size.

Build assets which are worthwhile and help your fortune last for a long time.

Enjoy but don’t splurge

All saving and investing, and no spending can make you a dull boy.

Do use a portion of your windfall to live it up. Fulfil some of your long-held (realistic) dreams.

Take that vacation, upgrade to a better car, or move into a bigger house. But just don’t overdo it and go for the splurge.

Regular doses of small comfort can give more happiness than the one king-size shot at luxury.

(This article was published on August 4, 2012)
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