This is one place where everyone would like to be in- have much more cash than required or having income that is much greater than expenditure. This could be due to a sudden windfall, inheritance, bonus, second income etc. What should you do if you are in this happy place? For starters, you should feel good about it and then be very careful with it. Many of us are less careful if the money is not from our regular income and are tempted to splurge by buying expensive things or experiences or use it to buy lottery tickets or for gambling. It is obviously sensible to make better use of it so that it helps our future financial security.
The important steps would be to save first, invest and then pay off debts. We have listed below various options that you can choose from –
Keep a Sufficient Emergency Corpus – If you have extra income or cash or gets some windfall, you should save it to ensure there is adequate cash for exigencies. Depending on whether you are young or have dependents or are close to retirement, the amount of cash for emergency purposes is different.
When you are young, it is recommended that you should have cash up to 2-3 months of living expenses (Expenses for food, utilities, housing etc.) as an emergency stash. When you have a family and/or loans, it is generally said that you need up to 5-6 months of living expenses as ready cash. When you are nearing retirement or are retired, a sum close to 2 years of living expenses is recommended as readily available cash.
Realign Financial Plan - If you still have excess cash after satisfying the conditions above, you should consider investing in some assets as per your financial plan. If you do not have a solid financial plan in place, you should consider making one. It will help you decide where to invest the excess money.
You might be tempted to put your money on that hot stock tip that you got from your friend or expert trader in the neighbourhood. But that is not such a smart move. You should make an informed decision based on current market conditions and personal financial standing. You should invest based on asset allocation suitable for you. You can also take the help of your financial planner/advisor to put the money in the best investments to get good secure returns.
You could also draft a will and then update your investments based on the same.
Pay off Debts – It is a good idea to pay off some part of your loans- educational loans, housing loans. Lower debt in your portfolio is always better. It also is a feel good factor to know that you have paid off your loan installments in advance. You should target the high interest loans first. Of course you should check the clauses/penalties/processing fees etc. for prepayment and then decide if the pre payment is profitable or not. You should also remember to consider the tax benefits you receive from certain loans like home loan and education loan and balance prepayments accordingly.
Invest in yourself and family – You should reward yourself for managing to earn more money as well. You can indulge in some thing that you always wanted or an experience that you always wanted to have. You can spend it on your family as well. You can acquire a new skill that you always wanted to have. You can pursue a hobby or two more seriously. You could also take up a course for inner healing like Vipassana.
You could also take up courses or certifications that will update your professional skillsets and enhance your career. If you are an IT professional, you can consider PMP certification. You could take up executive MBA programs.
This kind of investment will definitely enrich your life and career.
Give back to Society – Another way to utilize excess cash well is to give back to the society. You could support a cause that is dear to your heart. You could donate money to charitable institutions and/ or orphanages that work towards noble causes.
If possible, you could take a break from your daily job and participate in some voluntary work for the benefit of the society. For example, you can sign up for short-term assignments with (UN) United Nations or volunteer for some time at ‘Teach For India’ to teach India’s underprivileged children. These steps will lead to a more fulfilling life.
Take a break – Consider going on a nice vacation with your family & friends. Give them a surprise. Go read the book that you always wanted. Go close to the nature. Spend sometime and rejuvenate yourself. Listen to your favourite music. Relax & unwind. You will be back with far more energy and positivies.
The bottom line is that extra income should be saved, invested, used to pay off some loans and also should be used to reward yourself once in a while as you have earned it and therefore deserve it. You can also utilise it to give back to the community.