It is quite common to suddenly chance upon a windfall gain. It could come from a variety of sources. For example, you could have made a huge profit on your equity holding or you could have sold off your land in your village at a fancy price. The big question is what do you do with this money? Obviously, you need to ensure that you don't spend all of it and that you invest it wisely. Let us call this financial windfall advice or how to invest windfall money. The key question is what to do with a financial windfall and the decision is entirely in your hands. Here is a rundown on a five smart options..
Pay off high cost debt first and don't binge
You obviously must be having some high cost debt on you. It could be a credit card bearing 35% interest per annum or it could also be a personal loan with a steep 18% rate of interest. Use these windfall gains to first pay off your high cost loans. Even if you don’t want to pay them off fully, at least reduce the number of credit cards you have or repay some of the personal loans. This will not only improve your cash flows but will also be instrumental in improving your individual credit standing and you will see the impact the next time you access your credit score. This is a purely rational financial decision. When you repay a loan bearing 35% interest, you are virtually earning 35% return per annum. Currently, there is no investment that comes close to that kind of returns on a consistent basis. Above all, do not binge on non-essentials just because you have the money in your hand.
Make an estimate of when you will need this money
That is an important decision. Obviously, you do not want keep your windfall gains under your pillow or in a savings account. That is uneconomical use of these funds. Rather, what you can do is to allocate the money based on your time frame. For example, if you want to use part of the funds after a year then liquid funds is a good option. If you want to use the funds after 3 years then debt funds could be a good option. Finally, if you going to need these funds after 5-7 years then equity funds could be a viable option for you. Based on when you need the money, you can allocate to an asset appropriately.
See how you can lighten the pressure on your financial plan
This is another way to put your windfall money to good use. Your financial plan envisages certain check points for your goals like retirement, child’s future, home acquisition etc. If the windfall gains can be used to tweak the checkpoints, then that is a good idea. That means if your goal was to be originally reached in 10 years then you can use the windfall profits to realize these goals in 8 years. That gives you a good window to either enhance allocations or to widen your choice of goals. In the process, some of the goals you had originally shelved can now be revisited.
Reassess your risk tolerance after the windfall
This is something slightly more complex. Your risk tolerance is not just dependent on your age but also on your financial capacity. As your financial capacity increases, your risk tolerance also increases. That means, if you originally had an allocation of 40% to equities, then the windfall money helps you to enhance your risk tolerance and perhaps increase your equity exposure to 50%. This higher exposure to equities will enable to substantially expand your wealth creation capacity over the long term. This is something you must consider when you get windfall gains.
Just invest 50% of the amount in safe avenues; and invest in yourself
The big question is what to do immediately after you realize the windfall gains? One thing you must do is to invest about 50% in very safe investment avenues which are also substantially liquid. Liquid funds could be a good choice. They can give you a much higher return compared to bank deposits and at the same time they are also highly liquid. You can actually go one step further. You can structure a systematic transfer plan (STP) on your liquid fund wherein you regularly transfer a portion to a debt fund or an equity fund. This way your money earns more and you also get the benefits of rupee cost averaging.
There is one aspect of receiving windfall gains that most of us forget. This is the time to invest in your skill sets. Take up new courses, learn new skills, brush up your existing skills; all these can be much more valuable to you than you can imagine at this point of time. That could be the biggest take-away from your windfall gains!