Smart investment ideas: Deploying excess money

Nov 15 2013, 11:14 IST
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Most people are careless if they get sudden gains and either splurge it on buying luxuries. Most people are careless if they get sudden gains and either splurge it on buying luxuries.
SummaryPeople often tend to be careless when they get sudden gains; here are some smart ideas about using the surplus

Having surplus cash, or excess money, is one situation all of us like to be in. This could happen if you get a sudden inheritance, bonus or any form of extra income or gain. The important thing to remember in such a case is to be careful about how you use this extra money. Most people are careless if they get sudden gains and either splurge it on buying luxuries or forget about using it fruitfully and simply leave it in the savings bank account. Either way, it is not going to help you.

Here are some smart ideas you can use to deploy your excess money:

Create a contingency fund: Having an emergency corpus is of paramount importance. If you do not have one in place, then starting one when you have excess money is the best thing you can do. The amount of corpus to be maintained depends on your age, financial situation and number of dependents you support. It's generally recommended to have at least three months of expenses as emergency corpus if you are young and do not support anyone. This number reads as six months if you have a family and liabilities, and further increases to two years of expenses if you are retired or even nearing retirement age.

Invest in mutual funds: After you set up a contingency fund, look at your investment position. If you have not started investing in equities, this is the time to start. Equities have known to give the best returns over the long term. Do not invest directly in stocks; rather, it is recommended to start Systematic Investment Plans (SIPs) in some good quality mutual funds. Consult professional financial planners to realign your financial plan and invest in the most appropriate assets based on your risk appetite and financial situation.

Repay costly debt: Having excess debt in your personal balance sheet is quite unhealthy. This is especially true if you have high interest debt like personal loans. When you have excess money, you must pay off part or all your loans, to the maximum extent possible. Long tenure loans like home loans should be part-paid whenever you get a chance. Aim to pay off the high-interest loans first. You must keep in mind the prepayment or foreclosure charges when you pay back the loan. Also keep in mind tax benefits you may be getting on your loans like home loans and education loans and plan the amount you want to prepay accordingly.

Take a vacation: Taking a break from the regular routine is very important to rejuvenate and come back refreshed. You can use the surplus money you have by taking your family on a vacation. Consider getting away from city life and move closer to nature. Spending on a vacation can be considered as splurging if you are taking them too often and spending beyond your means. However, it is important to relax once in a while and this will help you come back with more positivity.

Invest in yourself: If your financial plans are in place and you get extra money, you can consider investing in yourself and your family. Although splurging on luxuries is not recommended, you can use the extra money to enrich your experience in a new area or acquiring a new skill. Investing in a course which can enhance your skill-sets will help you move ahead in your career as well. You can pursue a hobby which you always wanted to have, but did not because of the cost. You can also invest in a course for inner healing or mental well-being, as these will only help you in your professional life.

Contribute to society: Giving back to the society is rare and not many wealthy people do this. If you find yourself with surplus cash, you can contribute at least a small portion of it to the society. This can be done either by donating to a charitable institution or to an orphanage. You can also support a cause that is close to your heart. These steps can lead to a more satisfying life.

Create a contingency fund when you have excess money. The amount of corpus to be maintained depends on.

Prudent use

age, financial situation and number of dependents you support

* If you have not started investing in equities, this is the time to begin. Equities have known to give the best returns over the long term. Do not invest directly in stocks; rather, it is recommended to start SIPs in some good quality mutual funds

* When you have excess money, pay off part of or all your loans, to the maximum extent possible. Long tenure loans like home loans should be part-paid whenever you get a chance. Aim to pay off the high-interest loans first

* Take a vacation. Spending on a vacation can be considered as splurging if you are taking them too often and spending beyond your means. However, it is important to relax once in a while

* You can use the extra money to enrich your experience in a new area or acquiring a new skill

* If you find yourself with surplus cash, you can contribute atleast a small portion of it to the society. This can be done either by donating to a charitable institution or to an orphanage

The writer is CEO, BankBazaar.com

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