Bring down those expensive loans: Most of us have some kind of liability on our balance sheet - either as a simple credit card outstanding or a more complex home loan. Using windfalls for repaying loans and reducing your debt levels is highly recommended, especially if the loans are at high interest rates. If you have credit card dues or personal loans, then the interest rate on such liabilities is high and thus they should be paid off first. Part prepaying home loans should also be considered, as a prepayment will reduce your loan tenure, and as this will in turn result in lower interest payment over the entire tenure. Do remember to consider the tax benefits you receive for home loans and education loans. Plan your repayment in such a way that you both reduce your liability, and at the same time avail tax benefits as well.
Start a contingency fund: Most people ignore the concept of an emergency fund. We all face contingencies in our lives such as medical emergencies, loss of job, loss of pay, loss of capacity to earn due to accidents, etc. These events not only result in physical and emotional stress, but also drain you financially. Hence, the need for a contingency fund cannot be over emphasized. Remember that the fund you maintain should be used only for emergency purposes. The fund should be planned for as early as you can. If you do not have a contingency fund in place, then the best time to establish one is when you receive windfalls. Calculate your monthly expenses (including your EMI payments) and ascertain the amount of the emergency fund. Ideally, the amount to be built should cover 6 months of your expenses.
Invest for retirement: Planning and saving for retirement is usually not taken seriously by most people. Apart from the mandatory contribution to Employee Provident Fund, many people do not plan specifically for retirement. If you fall in this category, then it is time you start looking at retirement more seriously. Investing your windfalls towards this goal is a smart way of building and securing your future. There are various retirement options available today, including the Public Provident Fund and National Pension Scheme, which provide safe returns. The success of building a retirement corpus depends on how disciplined you are as an investor. However, beginning to save for this goal when you receive windfalls is a positive step in this direction.
Investment in equities: The equity markets have off late been very volatile and unstable. Hence investing a lumpsum what you receive as windfalls may not be advisable. However, equity investments give the best returns over the long term. Hence, it makes sense to start Systematic Investment Plans in good quality equity mutual funds and remain a disciplined investor over the long term.
The above are a few ways you can put your windfalls to use fruitfully. However, one golden rule you must remember when you receive sudden unexpected gains is to avoid spending impulsively. It is natural for one to purchase luxuries and buy a new mobile or a latest gadget when he finds himself with excess cash. However, spending everything you receive on such items will not help you in your finances over the long term. Allocate a small percentage of your gains on such luxuries and use a majority of the amount in a useful manner. Remember that life is uncertain, and any opportunity you have, you must look at making your financial position more secure by capitalizing on any extra cash flow you receive.