In the current Covid-impaired times, winning a lottery, getting a large, unexpected inheritance, or a lucrative compensation package may seem like manna from heaven, but it may come to a naught if you’re not careful about managing your wealth. Where do you start? Invest it, pay your debts or just fulfil all your lifelong dreams?
1. Beware of pitfalls, hire a financial adviser
“As a first step, you should park the money in a liquid fund and take your time deciding what to do with it,” says Mrin Agarwal, Founder & Director, Finsafe India. One, it will keep you from spending at will like you would if you kept it in a bank account, and two, it will earn interest while you decide.
Don’t go overboard: One of the biggest risks to the corpus is the feeling that it will last forever and the splurging that results from it. Many a celeb has lost his wealth to endless bouts of luxury shopping, travelling, giving in to addictions, be it drinking or gambling, or fulfilling long-cherished dreams. “Do not enhance your lifestyle significantly by going overboard with your spending, but upgrade it incrementally,” says Dinesh Rohira, Founder & CEO, 5nance.com.
Don’t invest, lend, donate blindly: It may be a good idea not to announce your fortune to the world. Not only will you be deluged with investment ideas and financial products, but also by mis-sellers, fraudsters and people seeking charity. “Charitable people like Bill Gates and Azim Premji have enough to sustain them for life and can afford to give charity. You should not dole it out till you have secured your own finances,” says Rohira. Also, do not pick up the first financial product suggested by your relationship manager or broker. Investment must be made in line with your age, goals and risk profile.
Take stock of existing wealth: The best option is to park your money in a liquid fund and consult a good financial adviser. With his help, take stock of your existing wealth and outline all the goals for yourself and your family. Once you have a clear idea about how much you have and what you want, the planner will help you create a roadmap to get there.
Tax impact: Also consider the tax implications that come with the bounty. If you have won a lottery, you will be taxed at a flat 30%, but an inhertiance on the other hand, does not attract any tax. Similarly, a large compensation in a new job could alter your tax bracket and you will need to talk to your adviser on how to restructure or make it more tax-efficient.
2. Secure your risks
In Covid times, where your health, life and family are at high risk, it is a good idea to secure these with your new-found wealth. Buy adequate health and life insurance, and build an emergency corpus. While you may assume you don’t require these due to the large corpus at hand, the money may not always be there, and allocating a part to cover risks will ensure you secure your future investments as well. Have at least Rs 20-30 lakh of health insurance, life insurance that is 10 times your annual gross salary and covers all your loans, and a contingency corpus that is at least a year’s worth of expenses.
3. Repay your debts
“You should allocate your funds to three buckets: repaying debts, saving and spending. Getting rid of loans should be top priority,” says Agarwal.
It is best to first get rid of the most expensive loans like credit card and personal loans, for which you are paying a high annual interest of 15-40% and not deriving any tax benefit. Essentially, if you are paying a higher interest for the loan than the return of your best investment, consider repaying it immediately. These should be followed by loans taken for depreciating assets such as cars. As for tax-efficient loans like education and home loans, you may not even repay immediately. In case of an education loan, the entire interest component is tax deductible under Section 80E, while for a home loan you get a deduction of up to Rs 2 lakh on interest and up to Rs 1.5 lakh on principal. “What you can do is earmark an amount equivalent to the loan and keep it aside. If you run into bad times, you will have the buffer to repay it with,” says Rohira.
4. Invest in line with goals
Finally, remember that no bonus, lottery or inheritance can last if you keep spending without making it grow. So invest wisely in instruments that will help you achieve your goals with the help of a financial adviser. It is also a good idea to educate yourself about investing.
What NOT to do…
1. Don’t take financial decisions in a hurry: A lot of money can bring to surface all the pent up dreams of a lifetime. However, spending on luxury cars, houses and vacations is also the quickest way to lose money, as is investing in wrong products. The best option is to take your time, consult a professional and make it grow in a way that it sustains you a lifetime.
2. Consider tax implication: Depending on the source of windfall, you may or may not incur tax, so check with a chartered accountant or a tax expert. For instance, while inheritance is not taxable, if you sell an inherited property, or it earns an income, you’ll have to pay tax.
3. Don’t offer too much charity: With a large corpus in hand, you may feel generous or grateful, and want to offer help to the less fortunate or charitable organisations. Curb the instinct till you get your own financial affairs in order and have secured your and your family’s goals and risks.
4. Don’t invest with family/friends: The windfall will sprout endless well-wishers, including family and friends, with advice and endless options on where to spend or invest it. Investing or starting a business with friends or siblings could make you lose you both money and relationship.
5. Don’t quit your job or retire early: It may feel like the money will last forever, but it won’t unless you take steps to make it grow. Even if you invest wisely, do not depend on the windfall to finance you forever. Continue with your job and do not plan early retirement till your goals are achieved.
6. Don’t keep money as cash forever: While it is a good idea to wait before you decide to invest, don’t wait forever. Keeping money in bank may be the fastest way to lose it because you will spend it at will. Lifestyle inflation and complacency are bound to make you go overboard with spending.
