The next thing that comes into mind is that what would you do with this money? Maybe you would pay off an existing debt, invest it or rather want to go on a vacation. So, before going ahead, there are a few questions to be answered as windfall income can change your financial position and there is a need to revisit your financial goals.
A windfall could prompt you to engage in impulsive buying and taking rash decisions, therefore it will be prudent to relax and come to terms with the changed scenario.The best thing will be to part away with your sudden income by parking it in a short term liquid fund till the time you have a clear vision to employ your funds. It's imperative to take a larger view of your financial picture rather than just concentrating on the present. Evaluate your long term and short term needs so that you can employ the additional resources wisely. Some of the main objectives to be reconsidered are:
* Scaling up your emergency corpus.
* Clearing of outstanding debt.
*Augmenting corpus for your child's education and marriage
*Boosting the retirement corpus
*Investing in a second home
Avoid asking tips from friends or colleagues on dealing with the sudden wealth as risk-appetite and financial needs differ from person to person. It is advisable to take guidance from professionals like Financial Planners and legal advisors to assist you to engage your funds in a better way.
Let's analyze that how windfall income can impact your financial goals: -
Impact on Insurance - Addition of wealth certainly means stepping up your life insurance cover. Review your insurance as you should maintain adequate cover at all times. At the same time, evaluate your revised insurance needs after you have bought a second home or expensive ornaments as your asset.
Impact on Debt - Evaluate if paying off an existing debt can help you in saving. It is sensible to pay off debts with a higher rate of interest than investing it in an instrument with a lower rate of return. The sooner you pay the debt, the sooner the money can start generating interest.
Impact on Investing - Be careful that you do not move away from your diversification methodologies. Sudden income can increase your appetite for risk but be cautious in your approach to dabble into new schemes or portfolios as you may not want to lose the money as easily as earned. Also, it is suggested that emergency corpus should be raised to a minimum of 6-9 months and the rest should be divided as per the asset allocation you follow to be in line with your goals.
Impact on Estate Planning - Now that your wealth is increased, it's time to revise your estate plan too. Draw up a will to allow smooth division of your assets in the event of your death. So, if you have physical assets than make sure that they are clearly and physically divisible. Carefully consider whether the beneficiaries of your estate are capable of managing them on their own. For instance, if you have minor children, you should consider setting up a trust to protect their interests and control the age at which they receive their funds. This ensures that your loved ones stand to benefit from whatever you have accrued in your lifetime including windfall gains.
Impact on Tax Planning - Consider investing the income in instruments which are tax efficient. You can even look at the option of investing it on your parent's name or a major child's name so as to be effectively saving tax.
Finally, it's time to celebrate the wealth gain as you truly deserve to treat yourself up with the things or experiences you dreamt of doing before, but be watchful as to not cross the limits.
About the Author:
Reenika is a Certified Financial Planner and has more than 6 years of experience in the financial service industry. She can be reached at firstname.lastname@example.org