How to spend wind­fall in­come wisely

Keep aside enough for fu­ture needs be­fore you splurge to ful­fill cur­rent wants, says Uma Shashikant

The Times of India (New Delhi edition) - - Times Personal Finance -

We live or­di­nary lives, en­joy­ing the sim­plic­ity of it. The un­com­pli­cated rou­tine of the job, a steady in­come with enough to spend and save is nice. Then the un­ex­pected hap­pens and we are not sure what we should be do­ing.

My friend just got cat­a­pulted into a league that asked for too many de­ci­sions to be made. She had worked for a startup for years. She had some ESOPs and hoped to re­alise a good value. But that did not hap­pen for a long time.

Af­ter a few failed at­tempts to get PE money, the firm just rolled on. Soon the pro­mot­ers found a strate­gic buyer and moved out. The new own­ers changed quite a bit about the firm, but my friend hung on, mov­ing up the lad­der and ac­cept­ing ESOPs in­stead of an­nual in­cen­tives. Her co­horts left one by one and she soon be­came a CXO.

Then the firm got bought over by a big player and my friend is now an un­ex­pected multi-mil­lion­aire, her ESOPs worth a fortune. Her erst­while col­leagues who aban­doned ship are en­vi­ous; oth­ers who en­cashed early are re­gret­ful; but most are happy for her good fortune. My friend is try­ing to keep calm amidst it all.

Her hus­band wants to in­vest the money in prop­erty. He also thinks they should sell off the sim­ple two-bed­room flat they live in and move into a more lux­u­ri­ous neighbourh­ood.

Their 24-year old son has been toy­ing with the idea of start­ing a new busi­ness with a few friends. They have worked on a busi­ness plan too. He thinks his mother should fund the en­ter­prise. He be­lieves that will give him a head start.

Her par­ents-in-law are of the view that she should help the oth­ers in the fam­ily. They think she must give a to­ken gift to her brother-in-law and sis­ter-in-law, to help them pay off their loans and up­grade their own lives. They want her to give money to her sib­lings too, to be fair to both sides. She also wants to help a few friends in need with her new wealth.

My friend thinks the money she will make is a re­ward for her ef­fort, and that she should in­dulge a bit. Maybe a new car, a fancy hol­i­day, a bet­ter life­style with full-time maid, and per­haps a big­ger house. How should she han­dle the fortune that has changed her life?

She should take the time to con­sider her choices, and ide­ally choose fi­nan­cial as­sets such as de­posits, bonds, sav­ing schemes, mu­tual funds and eq­uity shares.

In­vest­ing in prop­erty and land comes with its per­ils. These as­sets are chunky and can­not be liq­ui­dated in parts if needed. Rental yields are too low to make sense. She must de­sist from lock­ing her money in prop­erty.

She must treat the busi­ness ven­ture of her son as a se­ri­ous in­vest­ment propo­si­tion, and make it for­mal. She should be the an­gel in­vestor with stakes and board seat in the busi­ness, and must ac­tively en­gage and men­tor the ven­ture. She must in­sist on clear roles and re­spon­si­bil­i­ties and ad­e­quate con­trol and in­for­ma­tion for her­self as the pri­mary in­vestor. She must work with a de­fin­i­tive time line and limit her cap­i­tal in­vest­ment.

It is very com­mon for out­siders to view any large wind­fall in­come as be­ing freely avail­able for ev­ery­one’s use. Even the most rea­son­able peo­ple view un­ex­pected for­tunes of friends and fam­ily with a sense of en­ti­tle­ment, as if it was earned with­out much ef­fort.

There is a sim­ple rule of thumb to use. Al­lo­cate 30% for the fu­ture. Do not touch it. Al­lo­cate 30% to the present and to up­grade your stan­dard of liv­ing and to feel good about your fortune and en­joy it. Al­lo­cate 30% to your son’s busi­ness ven­ture. Keep the re­main­ing 10% for all the in­ci­den­tal de­mands. Mak­ing rules first be­fore al­lo­cat­ing the money al­ways helps.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.