Not having enough money to meet life goals can indeed be depressing. But having more-than-regular money to invest can be stressful too! In this article, we list scenarios when you could have more-than-regular cash flows and discuss how you should invest this money. Finally, we suggest a process to make such investments.

Investing non-regular cash Besides your regular income, you could have cash in hand due to the following reasons:

First, you may have cash from sale of an existing investment. If you have sold the investment at the end of a predetermined time horizon, then use the proceeds to meet the life goal for which it was intended. But what if you sold the investment at other points in time? That is, you may have another eight years to achieve your life goal, but you may be selling to capture, say, 25 per cent unrealised gains in your equity investments.

You need this cash to meet your life goal eight years hence. So, invest the proceeds in a bank deposit.

Ensure that the bank does not charge premature withdrawal penalty; you may have to withdraw the deposit before maturity and reinvest the proceeds in equity if the actual return on your portfolio in any year is lower than the return required for achieving your life goal.

Second, you may get windfall cash from inheritance, lottery winnings or gift. You are unlikely to receive cash from these sources on a regular basis. So, it may be tempting to spend the money on luxury goods and services. But save at least 25-30 per cent of the money and spend only the rest if you have to. You can use this saving to increase your emergency fund and buy more insurance, if required. In other words, use this saving to improve your protective assets, which is part of our wealth mapping process. Why? You may be unwilling to set aside money to increase your emergency funds from your regular savings; you may feel that the money can be used instead to invest and meet a life goal. Finally, you could have higher-than-regular cash because of salary increase or because your efforts to earn additional active income paid off.

This income source will flow on a continual basis. So, how should you use this money? Suppose you are already saving 20 per cent of your regular income. You should save at least 30 per cent of the salary increase or the additional income. You should invest this money through systematic investment plans in your retirement account. Why?

Moderate spending urges For one, your retirement may be far away. So, your priority would always be to meet your near-term goals. Routing your additional savings to your retirement account helps you pursue your long-term goals as well.

It is easy to suggest what you should do with the non-regular cash flows. The problem is that if you do not take investment action immediately, you are likely to spend the money on discretionary and non-discretionary expenses. So, how should you moderate this issue?

You should transfer the savings to a bank account earmarked for all your investments (call it master investment account). This is a savings account that you should operate in a bank other than the one in which you have your primary savings account. Do not hold a debit card on this account.

You must use this account only to make all systematic investments in recurring deposits, equity funds and for paying your home loan. This way, you may be able to route your cash flows into appropriate investments.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

Related Topics
comment COMMENT NOW