Ways to Maximize Surplus Income – let’s take a look
Salaries are rising, and if yours handily meets your monthly expenses with some left over, you may be wondering what to do with those funds. Sure, you could purchase things like a new car or jewelry or go out to eat or on vacation more, but you should consider investing most or all of your income in excess of expenses.
Why? Because you have the opportunity to make your money work hard for you, and generate passive income in the future. Here are five ways you can get the most out of your surplus income.#1:
Contribute the Maximum to Your Retirement Accounts
This is a no-brainer because the State Pension will likely be insufficient to fund your retirement lifestyle fully. You can direct deposit your surplus income to your employer-sponsored retirement account before taxes being taken out. If your employer matches contributions up to a certain amount, be sure to contribute at least that amount; otherwise, you leave free money on the table.
If you have surplus income over and above the amount you are contributing to your employer-sponsored retirement account, consider opening a private personal pension scheme that also rolls up tax-free and can’t be touched until the age of 55 (previously 50).
#2: Fully Fund Your Emergency Savings & Maximize Surplus Income
This is also a must. If you do not have emergency savings, you risk using credit cards to fund emergency expenditures, making those expenditures all the more costly due to interest incurred in paying them off over time. Conventional wisdom dictates having at least six month’s worth of expenses in a readily accessible savings account.
Let’s say your car breaks down and needs major repair. Your mechanic estimates it will cost £1400 to repair your car, and she will have it in the shop for four days. You need to rent a car for four days to get to work, which will cost £400.
If you have no savings, you may be forced to charge these expenses to your credit card. Let’s say you have a credit card that charges 16% interest, which is not very high – some cards charge as much as 22% or 24%! You have an extra £200 a month to pay this debt down. It will take you ten months to pay this off, and you will pay £130.56 in interest. Hopefully, no other emergencies arise in those ten months that require charging more!
Let’s say these expenses deplete your savings account entirely.
If you have £1800 in savings, you simply pay these bills as they come in and resume saving your £200 a month to rebuild your emergency fund. In ten months, you will have saved £2,000 plus interest at 1.65% AER gives you £2,015.25 in your savings account.
Ten months following emergency spending in the amount of £1800, you can either have no savings and have spent £130.56 in interest, or you can have £2,015.25 in savings and be ready for the next emergency. Think about how you would feel about your financial management skills in either case. Which position would you rather be in?
#3: Invest in Commercial Real Estate
Commercial real estate investing has not been accessible for individual investors of modest means until recently. Still, today the average worker can invest in commercial real estate as a means to diversify their investment portfolio, as real estate values vary independently of the stock market.
Individual investors can purchase shares in unit trusts and Oeics, which in turn buy shares in companies that invest in commercial real property. These are listed on the stock exchange and traded on a daily basis, and like any other investment in shares, gain returns through share-price appreciation and dividend income.
Real Estate Investment Trusts (REITs)
The benefit of investing in a REIT company is that REITs don’t pay corporation tax on their assets as long as 90% of profits are paid as dividends to their shareholders. This may mean a higher payout to you.
You will pay either 20% or 40% tax on dividends as a REIT investor because REIT income is classified as property-letting income.
Property Investment Trusts
Property investment trusts pool your money with that of other investors to buy commercial property and shares in commercial property companies. The difference between a property investment trust and an REIT is that a property investment trust is taxed as any other type of business. Tax on dividends for the 2021-22 tax year is 7.5% for basic-rate taxpayers on any dividends over £2,000 (unchanged from 2020-21), which increases to 32.5% and 38.1% for higher and additional rate taxpayers, respectively.
#4: Use a Hands-On or Hands-Off Online Investment Platform to Maximize Surplus Income
There are a number of online investment platforms available to investors in the UK, among them IG, Interactive Brokers, Saxo Markets, FinecoBank, Hargreaves Lansdown, FXCM, eToro, Pepperstone, Plus 500, XTB, IronFX, Vantage FX, CMC Markets, Robinhood, Interactive Investor, and DEGIRO.
You will need to research aspects such as investment minimums and fees for trading, annual fees, and other costs, as well as whether the platform will allow you to have a hand in your portfolio choices or whether a robo investor is used to invest according to your risk preferences.
#5: Invest in ETFs
ETFs, or Exchange-Traded Funds, are a bundle of securities such as stocks, bonds, and commodities. They are traded on the stock exchange and have their own ticker. Investing in an ETF allows an individual investor or modest means to diversify their portfolio with this one investment.
An ETF investor enjoys the features of a mutual fund along with the characteristics of trading individual stocks and shares at a much lower cost than either of those investment opportunities.
With any investment, it is prudent to do your research thoroughly. All investments other than insured savings come with some risk. Be sure to put your money where it will work for you and where you will be comfortable leaving it until you need it.
About the Author
Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.