Kolkata, January 1: There are times when you have a lumpsum amount at your disposal. This could be a bonus or payment arrears you have received. While, it is easy to spend it all, any lumpsum amount should be used smartly. We look at how you can make the most of any lumpsum amount you have.
Perk up your emergency fund: A lumpsum amount should find its way into your emergency fund. If your emergency fund needs to be replenished, you can use a lumpsum amount for it or even use it to add to your emergency fund. Remember that at all times it is important to have at least 3 month’s income in your emergency fund.
Pay off high interest debt: Why not invest the lumpsum amount, you may ask. We will come to that later but if you have a high interest loan like a personal loan or credit card debt, use an ,lumpsum to pay it off first. You may be paying up to 21 per cent on a personal loan and up to 42 per cent on revolving credit card dues. It makes no sense to invest money at lower rates of interest when you will have to pay much higher rates of interest on your loans. Have a talk with your lender, figure out prepayment penalties and close these loans at the soonest.
Pre-pay our home loan: A home loan gives you tax benefits and is a low interest loan. So it makes financial sense to continue with a home loan if you are comfortable with it. But if your total annual interest payment is more than Rs 2 lakh you will not be able to claim any tax benefit. In such cases or even otherwise, consider the option of prepaying your home loan. Once you prepay your home loan, you can either close your loan earlier at the same EMI, or opt for reduced EMIs. However, look at prepayment charges and do a cost benefit analysis before making a prepayment.
Build down payment amount: If you are planning to buy a home or a car, a lumpsum amount can be used for down payment. If you need to make the down payment in less than 5 years time, avoid investing the money in equities and chose debt instruments like FD where are returns are moderate but certain.
Invest, invest , invest: If you do not need to focus on the above things, the best thing to do with lumpsum money is to invest it. Before choosing where to invest a lump sum you have to consider factors like risk, return liquidity and taxation. The best way to invest a lump sum amount is in mutual funds. Choose the type of mutual fund depending on your risk appetite. If your risk appetite is high, invest your money in equity funds, or choose hybrid funds based on your risk appetite. If you want guaranteed returns, investing in 5-year tax saving FD is a good idea. You can also opt for debt funds.
Treat yourself: If you do not require the amount for more pressing needs, it always makes sense to use it for something you love. If you have been planning a dream vacation or wanting to buy some gadget, you can always use a lump sum amount to pay for it. Just ensure that you do not end up speding it for something you do not really need or on impulse shopping.