This post deals with a problem that many investors face: how to invest some “spare” money

📚 Table of Contents

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• Introduction
• Worked out example: goals known
• Worked out example 2: goals to be set
• Worked out example 3: spare money in retirement
• A note on having the prerequisites in place

Introduction

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 personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
• 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.

If you have extra money every month for investing, follow the process explained in this post: Where to invest additional money every month?

Worked out example: goals known

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.

Let us take this example.

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

The new allocation is:

These calculations are explained in this Google Sheets workbook.

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):

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.

Worked out example 3: spare money in retirement

A typical retirement plan, as described here, looks like this:

We will add five lakhs to the cash balance in cell D8 and let the model recalculate the allocations based on the current asset allocation.

However, this is the happy path with a retirement plan already in place. If the plan does not exist, please create one using the steps described here.

A note on having the prerequisites in place

At all-time ensure that you have the following in place

• An emergency fund with 6-12 months of expenses
• A term insurance policy (unless you are retired with no income)
• A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
• A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
• No high-interest debt like credit card or personal loans

and once you start investing,

• perform yearly review and rebalancing as per your glide-path
• never interrupt compounding by making these avoidable mistakes