When Extra Money Arrives

Money that arrives outside the ordinary monthly receipt — a bonus, an increment that has not yet been assigned, the maturity of a deposit, or the proceeds of a sale — is the moment at which many households open a new folio or make a purchase they had postponed. It is also the moment at which the order of use is most valuable. This article states that order. It is consistent with the six questions of the previous article and with the sequence already used in Wealth Creation: expensive debt first, then the reserve if it is incomplete, then an increase in existing mandates, and only then a new product.

The Order of Use

1. Unsecured balances that charge a high rate of interest. Credit-card revolving balances and personal loans are the first application. The saving of interest is certain. No diversified fund can be relied upon to exceed that rate in every year.
2. The emergency reserve, if it is below the household’s target. A bonus spent while the reserve remains at three weeks’ expenditure returns the household to the first pillar.
3. Tax that will otherwise fall due. Advance tax on a professional receipt, or tax on a capital gain that has already been realised, is not optional expenditure. It is the completion of the transaction that produced the extra money.
4. An increase in existing systematic plans or in the Employees’ Provident Fund contribution, where the employer still permits a change. The purpose has not changed. The amount available for that purpose has.
5. A new product, and only if a new purpose exists. A second flexi-cap fund is not a new purpose. A dated education goal that has no dedicated holding may be.

Proceeds of a Sale

Sale proceeds are extra money only after the tax on the gain has been provided for, and after any exemption the household intends to claim under section 54, 54F or 54EC has been funded in the manner those sections require. Applying the entire credit to a new purchase, and discovering the tax in the following July, is the error Series 1 recorded. The order above begins only after that provision has been made.

An Increment in Salary

An increment is not a bonus. It repeats. The durable use is to raise the systematic plan and, where cash flow allows, to accelerate the retirement of any remaining unsecured balance. Allowing lifestyle expenditure to absorb the whole increment is a decision. It should be recognised as one, not described as something that “just happened.”