The percentage of people dependent on employment salary who record surplus income every month on a regular basis is very low among the middle and low income earners. Most of the people within these two income brackets live from one pay check to the next. However, for those who take personal financial planning seriously by creating budgets, cutting down on unnecessary costs and increasing their income sources, they always find themselves with surplus income in their bank accounts. This idle cash in your bank account can either be a blessing or a curse depending on how you utilize the money in the end.
If you do not have a clear plan on how you are going to spend the surplus cash in the bank account, anything coming your way will be good enough. In most cases, the most enticing expenditures will be on short-lived luxuries that wipe out all the surplus cash in your bank account within a very short period of time. These unplanned expenditures can however be avoided if you have a clear strategy on how you will utilize your surplus income in a manner that not only builds your wealth, but also improves your quality of life in the long run. The following strategies can be applied by anyone with little or no financial background and ensure their surplus income is prudently allocated to things that matter.
- Save in a fixed deposit account
Leaving your money sitting in your current account is a bad idea. This is because most banks charge ledger fees every month on current accounts since they are meant to be operational accounts. It is therefore advisable to ensure that all your surplus income is saved in a fixed deposit account. In the fixed deposit account, your money will be earning an interest as compared to being charged monthly ledger fees when left in the current account.
- Venture into online trading
Fixed deposit accounts should be the first step but definitely not the only option at your disposal. The interest rate offered by most commercial banks might not necessarily be above the prevailing inflation rate at any given time. This means that your savings in the fixed deposit account will be losing value over time. For instance if your savings are earning an interest rate of 5% and inflation is at 7%, the net effect is that your money will be losing value at the rate of 2%. To counter this you can opt to utilize your savings in online trading where you stand high chances of getting returns that are way above the inflation rate consistently. However, before you venture into online trading you will need to take online tutorials and learn what binary trading is and use a demo account first to familiarize yourself with the dynamics of the trading platforms.
A lot of people say that binary trading is a scam. Well…this isn’t really true. Its not a scam in the sense that it is something illegal or fraudulent. It is however, an extremely risky way to invest. Modest money has an in-depth discussion of this on his site which I recommend you read (here).
- Invest through mutual funds and unit trusts
For the risk averse who might not like the idea of exposing yourselves to the high risks involved in online trading, you can allocate your surplus income to mutual funds and unit trusts. The benefit of these two financial instruments is that you gain from the expert strategies the professionals investing in the funds and trusts use. In addition, your money is invested in a highly diversified portfolio which ensures that you get high returns even when some asset classes perform dismally. Achieving the level of diversification that is executed by mutual fund and unit trusts at an individual level would require a huge amount of money; which is not at the disposal of ordinary citizens except for the high net worth individuals.
- Invest in dividend paying stocks
You can choose to be a fundamental investor and allocate some of your surplus income to dividend paying stocks. These are stocks that pay dividends annually hence ensuring that you get annual returns from your investment without having an active day to day monitoring process of the share prices like short-term stock traders do.
- Repay your debts
Finally you can opt to use your surplus income to repay all your debts that are still pending. Clearing your student loan and your mortgage should be your next priority after apportioning your surplus income to savings and investments. By clearing your debts early, you will free up more of your income that you were using to repay the debts and utilize it in growing your savings and investment portfolios and hence ultimately create more wealth for yourself.
As mentioned above, your surplus income should never stay idle in the bank account since it will be losing its value as inflation rates continue to rise. Instead, you should find one or a combination of the above 5 strategies of utilizing your extra cash more effectively in order to create more wealth for yourself.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.
