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Your fortune but everyone's advice: Simple thumb rule to manage a windfall

When blessed with a windfall, making rules before allocating the money always helps. Keep aside enough for future needs before you splurge to fulfill current wants.

ET CONTRIBUTORS|
Sep 16, 2019, 06.30 AM IST
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Even the most reasonable people view unexpected fortunes of friends and family with a sense of entitlement.
By Uma Shashikant

We live ordinary lives, enjoying the simplicity of it. The uncomplicated routine of the job, a steady income with enough to spend and save is nice. Then the unexpected happens and we are not sure what we should be doing.

My friend just got catapulted into a league that asked for too many decisions to be made. She had worked for a startup for years. She had some ESOPs and hoped to realise a good value. But that did not happen for a long time.

After a few failed attempts to get PE money, the firm just rolled on. Soon the promoters found a strategic buyer and moved out. The new owners changed quite a bit about the firm, but my friend hung on, moving up the ladder and accepting ESOPs instead of annual incentives. Her cohorts left one by one and she soon became a CXO.

Then the firm got bought over by a big player and my friend is now an unexpected multimillionaire, her ESOPs worth a fortune. Her erstwhile colleagues who abandoned ship are envious; others who encashed early are regretful; but most are happy for her good fortune, given the goodwill she has earned over the years. Advice is pouring in from all sides. My friend is trying to keep calm amidst it all.

Her husband wants to invest the money in property. He feels prices are good right now as the market is dull. He also thinks they should sell off the simple two-bedroom flat they own in a small housing society and move into a more luxurious neighbourhood. The husband is also contemplating retirement and enjoying the good fortune that the family has hit upon. Some rental income from properties, with some annuities and interest from investments should be enough for the rest of their lives, he believes.

Their 24-year old son has been toying with the idea of starting a new business with a few friends. They have worked on a business plan and are confident that their idea is a good one. He thinks his mother should chip in to fund the enterprise, now that she has the money. He believes that will give him a head start. Of what point is property that he will inherit many years from today, when he has an immediate need for capital, is his argument.

Her parents-in-law are of the view that she should help the others in the family. They think she must give a token gift to her brother-in-law and sister-in-law, to help them pay off their loans and upgrade their own lives. They feel the money is too large and that these gifts are easily accommodated. They want her to give money to her siblings too, to be fair to both sides. She also wants to help a few friends in need with her new wealth.

My friend recalls the long days, the sleepless nights, the tiring travel and the stress that came with every product delivery and customer service at work. She thinks the money she will make is a reward for those pains, and that she should indulge a bit. Maybe a new car, some jewellery, a fancy holiday, a better lifestyle with better support staff like a driver and a full-time maid, and perhaps a bigger house to live in. How should she handle the fortune that has changed her life?

There is no doubt that she must invest a portion of the money for her future and for the future of her family. She should take the time to consider her choices, and ideally choose financial assets such as deposits, bonds, saving schemes, mutual funds and equity shares. A diversified portfolio that generates income and allows for growth and appreciation of her wealth, will work well for her. It is not difficult to find a few products that meet her needs, and invest in them.

Investing in property and land comes with its perils. These assets are chunky and cannot be liquidated in parts if needed. The markets are murky, with several questionable underhand practices still prevailing. It makes little sense to stake hard-earned money in poor quality assets. Worst of all would be converting perfectly legal post-tax income into cash payment for a property deal. Rental yields are too low to make sense either. She must desist from locking her money in property. Both she and her husband must continue to work, and not take abrupt decisions all at the same time.

She must treat the business venture of her son as a serious investment proposition, and make it formal. She should be the angel investor with stakes and board seat in the business, and must actively engage and mentor the venture. She must insist on clear roles and responsibilities and adequate control and information for herself as the primary investor. She must realise that businesses started by very young people can take two routes—they do really well and make it big; or they lose interest after a few years and decide to wind down. She must work with a definitive time line and limit her capital investment. She should use her experience working with a startup, to guide the business in a manner that protects her investment.

It is very common for outsiders to view any large windfall income as being freely available for everyone’s use. Even the most reasonable people view unexpected fortunes of friends and family with a sense of entitlement, as if it was earned without much effort. There is no malice in what her in-laws are suggesting, but she and her husband alone must make the final decision. The money they give others in such a situation usually never comes back. What they give need not be large enough to be appreciated, but should surely be small enough to be written off without resentment.

There is a simple rule of thumb to use. Allocate 30% for the future. Do not touch it. Allocate 30% to the present and to upgrade your standard of living and to feel good about your fortune and enjoy it. Allocate 30% to your son’s business venture. Keep the remaining 10% for all the incidental demands. Making rules first before allocating the money always helps.


(The writer is Chairperson, Centre for Investment Education and Learning)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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