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