What to do when you've got more money than you need

Image credit: Steve Wampler/Flickr

Have you got more money sitting in your account than you need?

Some may ask, what's the right amount of money to keep in order to cover current expenses? Just like anything else, this will generate various opinions. But the safest thing to do is to keep enough money on hand to cover at least two months expenses. So what should be done with the excess?

Once in a while we may run into some loose cash and then the next question which pops up in our head is what to do with it: Should we consume more, buy that pricey car, spoil the loved ones in our lives or should we invest and hope it grows into something much bigger.

The conservative ones may choose to bury the extra cash in a savings account and don’t care if it’s earning next to nothing. "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Robert G. Allen.

Well, putting money in a savings account will not suffice.  As interest rates remain extremely low, your money is actually losing its value to inflation.

On the opposite end are the risk lovers, who may decide to do more adventurous stuff with the money. Here you have people who might decide to make riskier investment choices, acquire businesses, or become business owners themselves. This has its cons too.

Businesses also contain an element of risk and statistics have revealed that when investing in new businesses, if the amount of money required for the business is $10 for instance, you should be ready to forgo double that amount. It has also been shown that the first invested sum usually goes down the drain (sunk cost). So except you happen to be one of those lucky ones who’ve got the instincts of a cat and know when not to invest, this option might just be darn too risky.

So now you know that keeping large sums in a savings account is like burying one’s talent in a napkin, and you also know that it’s not advisable to dive headlong into investing in businesses, one may decide to shun investments and divert all funds towards consumption. Now is this a smart decision to take? Let’s find out, shall we?

Let’s draw from the experience of John; John was gainfully employed with a commercial bank in the city. He earned an impressive income and lived comfortably in a rented luxury apartment, he ensured his children went to the best schools and his wife made her hair, make-up, shopped, and so on, in the choicest places in town; vacations were being enjoyed lavishing, at times weekends were in exotic cities, he changed his cars at will and changed his phones immediately a later version was introduced. He was living “the life”...He truly was.

However, due to one Government policy, restricting banks from delving into some business lines, John’s job function was rendered redundant and in no time he was laid off by the bank. Thus he had no source of income; he had to move to a cheaper apartment in the suburbs, switched his children’s schools, and cancelled the customary lavish family vacations, etc.

Now, John was in trouble, he then realized that with the amount of money that had gone through his hands, he would have been able to secure a better future for himself and his family if he had spent wisely, rather he lived only for the moment and consumed all. John overlooked something very vital.

So, I think we’ve all learnt from John’s experience, and you can now agree that it is better to use that spare cash to kick-start something that promises a high probability of multiplying your wealth. I’m referring to sound investments now.

The good news is that you don’t have to be a genius to invest well. Buffet once said, “You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ...” Did John ever hear this? I very much doubt that.

Safeguarding you from John’s missteps, our Investment road map should be able to guide you in making sound investments.