There could be multiple reasons when one can have a certain sum of money saved in the bank. Either you did not invest the money for a while, or you got it as a windfall or bonus. Here is a quick checklist that you need to follow if you suddenly have a fair bit of money that you need to invest:
does your emergency fund have 6 to 12 months of expenses?
have you paid off all high-interest debt like credit cards and personal loans?
do you have term insurance for all earning members of the family?
do you have a family floater health insurance and a super top-up plan?
do you have a sinking fund for insurance payments (health, car) and known recurring expenses (building maintenance, holiday travel etc.)?
If any of these are incomplete, please complete them before moving on to the next step. Consider if there is some small expense that you want to make, as a white goods purchase or a vacation, then allocate that money now. You will be investing the remainder as per goals in the same asset allocation as specified in your goal-based investing plan.
We will use our holistic goal planning template to plan for this particular lump sum. There is always debate whether to invest the money at one go given, what market levels are today (August 2021). We have discussed this in a previous post and here as well.
Here we’ll take the example of a family with goals figured out: a house purchase, child’s college education and marriage and retirement goals, plus a few others.
We will add the entire ₹ five lakhs to the cash balance. The tool will automatically reallocate that using the current asset allocation for all goals like this:
Step 1: add five lakhs to the cash figure in cell K10
Step 2: distribute the money to one of the goals like house downpayment (cell I14) that was underfunded
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Worked out example 2: goals to be set
In a previous post on the importance of goal-based investing, we have discussed why it is essential to set a goal before any investment starts. Since investment goals are not in place, now would be a good time to follow the steps in that post and set them. Once we have decided on them, we will use the same goal-planning template to start investing the lump sum money.
We will use the online Goal-based Investing calculator to estimate getting started on a retirement goal 15 years away. We will assume yearly ₹ 12 lakhs of retirement expenses (you can calculate retirement expense here):
(click to open in a new tab)
As the example shows, you will invest the ₹ five lakhs lump sum amount as ₹ 3.00 lakhs in equity and ₹ 2.00 lakhs in debt today. You will need to start a SIP of ₹1,79,800 monthly. You should invest ₹1,07,880 in equity and ₹71,919 in debt. This SIP amount will have to be increased by 5% yearly to stay on track. Delaying investments will make this SIP amount shoot up.
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This post titled I have ₹5 lakhs in the bank. What do I do now to get the best returns? first appeared on 31 Aug 2021 at https://arthgyaan.com
