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  • Writer's pictureAkshay Nayak

Ordinary Ways To Manage The Extraordinary

Most of us would at some point of time in our lives, face a situation where we receive income that is sudden or unexpected. This could be in the form of a significant cash gift from a parent or close relative, a lumpsum gained on the back of speculative activity, or a large inheritance that is handed down to us. Such income is called a windfall gain and is usually equal to a significant portion of our current net worth, or even a certain multiple of our net worth (say 10 times our current net worth). It therefore does not include routine annual salary hikes or annual bonuses we recieve from our employers. We usually employ any windfall gains we receive entirely towards upgrading our lifestyles. While this is understandable, the fact is that such an approach can seriously damage our overall financial health in the long run. This is because windfall gains give us an opportunity to address multiple areas of our finances in a single go. And single minded focus on consumption would see us miss a golden opportunity to improve and consolidate our financial health. Therefore we must always have a framework in place which would help us digest and employ any form of extraordinary income that we may receive in a way that balances consumption and planning for the future. So today I am going to share a few guidelines to be kept in mind when dealing with a significant amount of extraordinary income.


Let us say an individual with a current networth of Rs 30 lakh recieves an inheritance of Rs 3 crore. This is a classic example of a windfall gain. The first thing to keep in mind in such a situation is that the amount we receive may not be completely available to us for use. This is owing to potential tax implications associated with windfall gains we receive. Therefore we must first figure out whether there are any tax implications that may be associated with our gains and settle them immediately. We may enlist the help of a qualified chartered accountant or tax consultant to guide us through this process. Once that is done, the net amount must initially be parked in a liquid fund of reasonable quality. Typical psychological tendencies dictate that receiving a significant amount of money all of a sudden sees us become impulsive and rash with regard to how we employ the money. Parking our gains in a liquid fund and waiting for 48-72 hours would allow our emotions to die down so that we can remain rational when deciding the next course of action.


Once the net amount has been parked in a liquid fund the next step would be to consult our families to access and decide our financial priorities. We must sit down with them, list our financial needs to and rank them terms of priority.

Those of us who have any outstanding loans would be well served prioritising debt repayments over everything else. For instance let us say that someone pays taxes worth Rs 50 lakh on an inheritance of Rs 3 crore. This leaves them with a net amount of Rs 2.5 crore. Let us further assume that they have outstanding debts worth Rs 50 lakh. The net amount of Rs 2.5 crore must first be used to pay off the debts worth Rs 50 lakh. This would leave a balance of Rs 2 crore. Next, they may consider reviewing their life insurance requirements and reducing their life insurance cover if and as required. Life insurance is mainly meant to cover for loss of income in the event of our death. Windfall gains like an inheritance reduce our dependence on our income in the future. So our life cover may be altered proportionately. For instance someone with a life insurance requirement of Rs 3 crore may now reduce their cover to Rs 1 crore, since Rs 2 crore is provided for by the inheritance. On the other hand, someone with a requirement of Rs 1.5 crore can simply surrender their life cover since the value of the inheritance exceeds their life insurance requirement. We may also consider putting at least one third of the balance into a pension scheme from a reputed mutual fund house to provide for our retirement. These schemes are different from the traditional annuity based pension plans offered by insurance companies.


An inheritance would dwindle over time regardless of its size, if it is not managed well. Therefore once our insurance needs have been assessed and met, we would need to come up with a plan to invest the amount we have available to us. The best way to do this is to employ the bucket strategy. This strategy is usually prescribed with regard to managing our retirement corpus in our post retirement years. But the same principles may be followed to manage an inheritance. The strategy involves bifurcating our money into different compartments or buckets to provide for our monetary needs over various phases of time. A sample illustration is given in the graphic that follows.

Money required between the present moment and the succeeding 3 years may be parked in cash and near cash assets such as savings deposits and liquid funds. Money required over 4 to 7 years may be parked in fixed deposits, bonds and debt mutual funds. Money required after anything more than 7 years may be parked in riskier investments such as equities (including direct stocks and mutual funds). Between 5-10% of the inheritance amount may be used for splurging and consumption. Setting up of these buckets and implementation of the strategy would usually require expert guidance. We would therefore be best served working with a qualified financial planner to assist us with the process.


Those of us who wish to use a portion of our windfall gains to buy ourselves a new home. Assume that someone with a net windfall gain of Rs 5 crore available for investment may wish to buy a home worth Rs 2 crore. While this may not seem like the worst decision at first glance, it must be borne in mind that the purchase cost is not the only form of cost that is incurred when a house is purchased. At least 10% of the purchase cost of the house must be provided for as maintenance cost. We may also need to appoint and pay a property manager if necessary. Not to forget the various tax implications involved with purchasing or constructing a new home. Also, if we need to relocate to another region shortly after buying the home could mean that the property remains vacant for long periods of time resulting in the loss of potential rental yield. Therefore home ownership is more expensive than it seems. Any decision to purchase a new home with our windfall gains must only be made after keeping these factors in mind.


Being the beneficiaries of a windfall gain also means that we would attract a lot of attention from family and friends around us. Requests for monetary support may also come our way. In such a situation, it is important for us to keep emotions out of the equation and extend monetary support only to those who are truly deserving of it. Any friendly advice on how to manage our gains must also be viewed objectively and assessed for relevance before such advice is acted upon. Receiving a windfall gain does not mean that we also recieve the skills required to manage the amount. The absence of a clear process to manage windfall gains is sure to lead to damaging errors. A simple but clear process for management of windfall gains is therefore crucial to maintaining good financial health.

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