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To spend first or invest that windfall gain?

It’s a constant tug of war – to invest more or spend? If you can’t spend on the things you desire, what’s the point of investing? The answer perhaps lies in achieving the right balance between the two.

The traditional employee waited for annual bonuses and increments in the new financial year to indulge in that big spend. While this lure continues for many, for others there are windfall gains like vesting of stock options and mid-year salary hike thanks to fresh funding, which come about at any time in the year. There is going to be temptation to start spending this gain, at the same time there will be a soft but significant voice at the back of one’s head that rationalises utilising any windfall gains prudently towards investments.

It’s a constant tug of war – to invest more or spend? If you can’t spend on the things you desire, what’s the point of investing? The answer perhaps lies in achieving the right balance between the two.

Once the spending amount is clearly defined, you will know how much you now have to invest. Choose your investment options based on your existing portfolio of financial securities and future financial goals.

Plan your spending first…

You should, definitely, not spend your entire gain on acquiring material possessions. Make the necessary spends, perhaps a down payment on a new car or getting the house re-painted. After that, allow yourself some indulgence but assign a limit. Your limit could be 10% / 15% / 20% of your gain depending both on the absolute figure and on your accumulated savings.

If your accumulated savings pile is low then keep a low limit for spending on pure indulgences. On the other hand, if you have so far done a good job of regularly monitoring your frivolous spends and opted for higher proportion of investments, then you should allow yourself more indulgent spends with a wind fall gain.

Planning the spend will also help you to optimise the cost of big-ticket expenses by looking for the most reasonably priced options rather than making impulsive purchases.

… but always make your investment first 

Once the spending amount is clearly defined, you will know how much you now have to invest. Choose your investment options based on your existing portfolio of financial securities and future financial goals. This means you must ensure that this next investment helps you remain diversified across debt, equity, and other asset classes as well as in your choice of specific products. At the same it, it should enhance your ability to achieve the marked out financial goals.

Having done all this, the first step in execution should be towards investing rather than spending. It’s easier to over-spend than to over-invest. If you do end up over-spending, the excess will naturally come from the amount earmarked for investments. That behaviour can set you back in terms of achieving your financial goals. Hence, first invest and then spend.

This approach may appear rather frugal to the carefree lifestyle spender. However, if you sit down to do the math around how much is required to simply maintain your current lifestyle post retirement, you will realise that whatever you are saving today can easily fall short. Be wise, extend any gains first towards enhancing your long-term investments and then make your indulgent spends.

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