Posted by Mike Smith :: July 19, 2008 @ 9:07 am

When you are living at your means, you are at that balanced point where your expenses are exactly equal to your income. By committing excessive income, you can reach this point while saving considerable amounts of money.

Leaving surplus income uncommitted lets your bank account grow. It also leaves that excess money in a place where it is easier to spend. Committing surplus income to a saving and investing plan allows you to put your money to the best possible use and also helps control impulse spending. Your commitments can include transfers to college saving, P2P lending, retirement, high-interest savings, or other investment accounts.

It can be frustrating to see your bank accounts sitting stagnant while you are working so hard to save. That frustration comes from the outdated notion that your bank account is equal to your net worth. By including all of the ways you hold your wealth, you’ll see the results of your efforts as committed surpluses continually raise your net worth.

You should begin this process of committing most, if not all, of your surplus income as soon as your debt is retired and your bank accounts are sufficiently funded to cover any unexpected emergencies. Until that time, a portion of any surplus can still be used in this way to set the habit in place.

As you make strides to reduce expenses and raise income, you will have even more surpluses to commit to your investment and savings accounts. You may start to despise growth in your bank account as it indicates an inefficient use of your money. Committing excessive income can be an addictive habit that exponentially increases your positive net worth in ways less visible but much more effective than a rising bank account balance.