Use windfall to plug gaps in finances

Prepay loans and hike SIP amounts before you think of discretionary expenditures

The government decided to give its employees a Diwali bonanza by hiking their dearness allowance from 12 per cent to 17 per cent. Around 5 million government employees and 6.5 million pensioners are expected to benefit from this move. The hike will be effective from July. While the government perhaps expects you to spend the money, provide a boost to consumption and get the economy going, an increase in salary is a good time to plug the gaps in your finances.

Experts are of the view that government employees should be cautious with both the lump sum amount (the arrears from July onwards) and their salary increment. A larger portion should be saved and invested, and only a small portion should be spent on discretionary expenses. The economy is slowing down. Some government employees’ spouses could be in the private sector. They could be at the risk of job loss due to downsizing by their employers. With government revenue collections not growing as expected, future increments for government employees could get delayed or get smaller.

Also, government employees don’t get increments as regularly as those in the private sector. “Expenses would have gone up since the last increment and investments would have fallen, so government employees need to make up for that,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Asset prices have also not grown at a robust pace in the past couple of years. Returns from equities have been anaemic, interest rates have been declining (so returns from fixedincome products have also come down), and real estate prices have been largely stagnant. Only gold has done well over the past year. “All investors, including government employees, need to invest more, so that they are able to hit their investment targets,” says Dhawan.

The lump sum amount that government employees receive could be used to prepay loans. “If you have a housing or a car loan, use the arrears to reduce the principal outstanding. Such periodic pre-payments help reduce the total interest outgo and loan tenure,” says Abhinav Angirish, founder, Investonline. He is of the view that at least 70 per cent of the lump sum received should be used to prepay loans, or should be invested.

Depending on the amount received, government employees may also use this windfall to fill the gaps in their financial plans. If they have not set up an emergency fund yet, they could channel this money towards doing so. If their term insurance is inadequate, or they feel the need for a personal health cover (over and above the government-provided health care facilities), the money can go towards filling these gaps.

To avoid the temptation of spending the lump sum amount, first invest it in a bank fixed deposit or liquid fund. Once the excitement of having received the money dies down, decide where you would like to deploy it.

Now that they will receive a higher salary, government employees should boost their investments proportionately. “Use the salary increment to top up ongoing systematic investment plans in mutual funds for the fulfilment of long-term goals,” says Rajesh Cheruvu, chief investment officer, Validus Wealth. Recurring deposits, Public Provident Fund, short-term debt funds, and gold are other places

where the extra money can be deployed, in line with the person’s asset allocation. Those with loans can request their lenders to hike their equated monthly instalments.