How to spend windfall income wisely

NEW DELHI: 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

employee stock ownership plan

(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 multi-millionaire, 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. My friend is trying to keep calm amidst it all.

Her husband wants to invest the money in property. He also thinks they should sell off the simple two-bedroom flat they live in and move into a more luxurious neighbourhood.

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 too. He thinks his mother should fund the enterprise. He believes that will give him a head start.

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 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 thinks the money she will make is a reward for her effort, and that she should indulge a bit. Maybe a new car, a fancy holiday, a better lifestyle with full-time maid, and perhaps a bigger house. How should she handle the fortune that has changed her life?

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.

Investing in property and land comes with its perils. These assets are chunky and cannot be liquidated in parts if needed. Rental yields are too low to make sense. She must desist from locking her money in property.

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 work with a definitive time line and limit her capital 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 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 author is chairperson of The Centre for Investment Education and Learning)

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