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Managing Surplus Funds - Why Save?

Why Save? Can you imagine a situation where you do not have to work and have plenty of money paid to you as often as you need? How can this happen? Interest, yield and royalties. If you own assets that pay these, then you are potentially set for life. All you need to do is save and buy them, or make them by your direct effort.

Making Your Savings Work For You

Let's imagine you have saved and invested your way to $250,000 in the bank. If you earned a return of 10% per annum, you could earn an income of $25,000 per year just by living on the interest. Current income for little current effort, nice. This is called passive income.

 

With passive income you can have more choice in life, choice to work, choice to do what you want, choice to purchase, choice to pursue your interests without too many financial cares. Sometimes just the lack of stress over money is enough for a family relax and grow closer.

How To Ensure You Save

Consider your savings for the future as a bill (let’s call it a Future Fund). This is the most important bill and it comes from surplus cashflow. The best way to ensure a surplus is to force one. Determining your Future Fund payment amount and paying it before all other bills ensures you save. Thus the rest of your expenses tallied with the 'Future Fund' payment should equal the total income for that period (including irregular income). If you receive extra money, say from a gift or a bonus of some sort, then put it straight away as it will help you reach your goal of financial independence sooner. Leaving this to last usually begs the question ‘Do I have any money left over?’. Force the leftover.

How Much Should Regular Savings Be?

Exactly how much should you put away for your future? At a minimum the age-old figure is 10% of your net income, that is after tax. Obviously the higher the better, I would aim for 25% or better. If you could save 75% of your income each month you would be financially independent VERY quickly.