So, you won the lottery? Congrats!
Or a great-uncle left you a sizable inheritance?
Or you sold an ancestral property?

For many people this sudden increase in wealth causes more problems than comfort. This is because after receiving huge windfalls, people either get confused as to what to do with this money, or worse they form bad spending habits and lose a valuable opportunity to straighten and strengthen their finances.

In this post I would be sharing a step by step guide of managing and investing a lumpsum amount so that this good fortune remains just that.

Here we go :

• Step 1: Park your money and keep it safe
  Most likely this is an unexpected and unplanned money, which means that you don’t have any plan or idea as to how to utilize this money. Instead of acting rashly and making wrong decisions, it would be better to park your money in a safe avenue for the time being. This will provide you with a much needed time frame in which you can decide how and where you will use your new found riches. The best vehicle for parking the money for a short duration is definitely liquid mutual funds. They invest in short term instruments which are completely safe and can be liquidated easily. The best part, they can be redeemed immediately and your funds will be transferred to your account on the same day. Its like keeping your money in a savings account but earning better and higher returns.
• Step 2: Check tax implications
  Never forget the taxman. Be aware of tax implications, if any, of your sudden wealth. This is because taxes mean that not everything you have is yours to use. If the source of your money was inheritance, there is good news: you don’t have to pay any taxes. You also don’t owe anything to the taxman if you received money in the form of gifts from relatives either (read more about taxation on gifts here). But lottery winnings or cash prizes are taxable at a flat rate of 30% (plus applicable cess and surcharges if any). No matter what the amount of your winnings, 30% will be taxed if you won as low as ₹10,000 or as high as ₹1 Crore. So keep taxes in mind.
• Step 3: Indulge Yourself a little
  It’s tempting to spend it all on instant gratifications but bear in mind that you will be foregoing a bright future for a few days of fun. But you don’t have to totally devoid yourself of a good time. It would be wiser to treat yourself a bit by taking a tiny portion of your windfall and spending it on you & your loved ones. Once you’ve done this the temptation will be gone & you’ll be able to plan better.
• Step 4: Pay off Debt
  Paying off or reducing your existing debts is the most important step you should take. This excess money provides the best opportunity to go debt-free, so grab it with both hands. Start with high interest debt like credit cards and work your way down. Being debt free is the best investment strategy, because of two main reasons: (1) you don’t have to pay any extra money as interest and (2) you can convert the money you were paying as loan EMIs into Systematic Investment Plan or SIP and fulfill your dreams and goals.
• Step 5: Setup Emergency Fund
  Next logical step is to ensure you have an adequate emergency fund available with you. This is because financial emergencies never call in advance, they just drop in unannounced. If are not ready to face them, they can set you back really badly. Therefore use this money to start or fulfill you existing emergency fund quota. Read my earlier post to understand the nitty-gritty of emergency funds.
• Step 6: Invest the rest of the money
  The last step should be investing the rest of the windfall properly. Your time horizon and risk appetite will be the main factors in deciding where to invest the lump sum. If you really want to play it safe then a Debt fund is your best option. If your risk profile is moderate you can consider equity oriented hybrid funds, and if you are an aggressive risk taker and have a long investment horizon, the best choice for you is equity mutual funds. Keep in mind that you should never invest in an equity fund in one go.
  My suggestion would be to go for Systematic Transfer Plan. The STP mode of investment will prevent you from getting caught in a stock market cycle and you can actually turn market’s ups and downs in your favour – with an STP you can  invest the entire lump sum in a debt fund and systematically transfer small portion every month in an equity fund.

If you are one of those lucky ones whose financial life is already in order (no debt and enough liquidity for unforeseen situations) and this windfall is actually nothing but extra money. In that case you can follow the famous 80 – 20 rule. Invest 80% of the money and spend 20%.