How to Manage Your Lottery Windfall Gains

By ketkih | September 19, 2015

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If you’ve just won a lottery or had windfall gains from the equity market, congratulations!

The next question always is, what are you going to spend it on? But have you considered not spending it just yet?

It may sound like an outlandish idea but there are ways you can use these gains to make even more money, which is always a great idea for the long term.

Read on to know more about hanging on to your winnings just a little longer and find out if you can you call yourself rich now.

Soak up the Moment

When your bank balance swells unexpectedly, there is an initial tendency to go berserk. So, you need to settle down. You mind might be clouded and the chances of taking rash decisions are pretty high in the initial period. It could better to keep away from the money for a while.

Lock your money in some short-term debt instruments until rational thinking sets in.

Additional read: How to invest in MF when your time horizon is less than 5 years

Another important thing is to take the advice of an expert on the future course of action. Ignore unsolicited advice of Tom, Dick and Harry.

Prioritise Spending

This is the most important. Earlier, you might have thought of a month-long vacation to Europe or a high-end car. That’s when you will have to restrain yourself. Don’t try to fulfill your entire wish list at one go. The money will be gone before you can say ‘Bonjour’ to your new car.

Spend judiciously and allow your money to grow too.

If you are in late 60s, the spend to investment ratio should be ideally 10:90.

But when you are younger, say in the age group of 30 to 40 years, the ratio could be 35:70, as many people at that time could be acquiring assets, such as houses and cars.

The point to be kept in mind is that money should be expended to increase your living standard entirely and not just for a short while.

Close Debts

Repay loans and have a sound sleep.

When money rains make good use of it. Try to immediately close debts, such as outstanding credit card payments and high-interest personal loans, and start life with a clean slate. If the EMI of your housing loan is too high and may go northwards, then it’s better to close that loan account.

This will give you immense opportunity to concentrate on investing in some gilt instruments.

No debt and no worries.

Investments and Long-term Goals

Goals and investments should go hand in hand.

Invest with care to reap fruits later. It is easy to spend money and very difficult to save it, we all know that. So save the windfall gain to make your future secure. Educating your children or spending on their wedding are some of the long-term goals that should get priority while taking an investment decision.

Moreover, the need to create an emergency fund cannot be stressed upon enough. If a person wins the lottery at a young age, they don’t need a huge emergency fund, but an older person has greater risk and should judiciously prepare for emergencies.

A young man may need an emergency fund to the tune of 5% of the gains but for an aged person, that portion can climb up to 25%.

There are 6 essential financial planning goals that you should always keep in mind, including lifestyle and retirement.

Manage Tax Liability

With investment comes the scourge of tax.

The decision about how much and where to invest depends on the influence on tax. Guard against capital gains tax. If you are acquiring and selling a property within 2 years, the short term capital gain tax will be higher compared to long term capital gain tax.

In the case of equity shares, the short term capital gain period will be one year and for long term capital gains, more than two years. It is always advisable to invest in tax-free bonds.

Additional read: Nifty Tax Savings from Investing in Property

There are a lot cases of lottery winners who’ve ended up in worse situations once they raced through the money. Now you know how not to end up on the same list as them.

 

YOU MAY ALSO WANT TO: Find out just how much richer those investment plans are going to make you – SIP Calculator

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