What to do with your surplus income?

Written and accurate as at: 19 March 2013

A budget is designed to help you identify your spending habits and monitor and manage your cashflow. If your budget points to there being surplus income left over each pay, it helps to have a plan for these savings – otherwise you may be tempted to splurge on things you don’t need and any surplus income will just slip through your fingers.

It might not sound like much, but that extra $5, $50 or $100 a week in surplus income is the equivalent to $260, $2,600 or $5,200 a year – expand that over 5, 10 even 15 years and you could be doing yourself out of some significant savings! Our Savings Calculator can show you the outcome of saving small amounts of money over a longer period of time.

So rather than just spend your surplus income, here are a few suggestions on what else you could be doing with it:

Make Extra Repayments on your Home Loan

Making extra repayments on your home loan will not only help you to repay the loan quicker but it could also save you from paying a large amount of interest.

As an example a $5,000pa increase in home loan repayments on a balance of $250,000 with an interest rate of 6.5% will reduce the term of the loan by years and result in interest savings of over $27,000 over the years, which in turn means each repayment pays off more and more of the capital amount owing.

Tip – You could either transfer surplus cash into your loan on a regular basis, or use a salary crediting arrangement. Salary crediting means having your surplus cash flow paid directly into your home loan. It enables surplus funds to reduce your outstanding loan as soon as possible.

Set up an offset account on your home loan

If you aren’t certain of what you want to save for and may need access to savings in the future, you can still make extra repayments off your home loan but direct them to an offset account.

A 100% Offset Account operates as your normal transaction account, ensuring that you retain complete flexibility and access to your funds. It is a separate account to your loan, however, when your interest is calculated, the funds held in this account are ’offset’ against your loan, effectively reducing your interest liability.

Tip – Check with your lender first as fees may apply to establish this type of arrangement.

Repay other Debts

Repayment of debt can be one of the most beneficial strategies to put in place. By paying off your car loan and personal credit card debt sooner you will have more surplus income to invest or spend and you will save money in interest repayments and take a financial load off your shoulders.
Tip – Focus first on those debts with the highest interest rate as these are the amounts that you are paying the most interest on and the ones that you will benefit most from making extra repayments to.

Start savings for your Children’s Education

Funding children’s education can be a costly exercise, particularly if you intend to support your children through private school and into university. The earlier you start saving for your children’s education the more compounding will work in your favour.

There are many ways to save for education costs and long-term investment options such as shares, managed funds, term deposits and specifically designed education funding plans may help you get there.

What all of these options offer is the power of regular saving and the benefits of dollar cost averaging over the years. Our article on When may be an appropriate time to invest? explains how as an investor you can benefit from dollar cost averaging.

Superannuation Contributions

Making extra contributions to superannuation either on a pre or post tax basis can really boost the amount of money that you have to retire on.

Your options are to either have salary sacrifice contributions made by your employer to superannuation (i.e. redirect money from your gross salary into superannuation before tax is applied) or contribute to superannuation from your after tax savings. Which is the better option for you will depend on individual circumstances and tax position and you should seek personal advice to determine the best approach for you.

Tip: If you earn less than $46,920pa, the Government will match your after-tax super contributions. The co-contribution matching rate is 50c for every dollar of after-tax money you contribute up to a maximum of $500.

Put it in a high interest savings account

If you have future planned expenses such as a new car or an overseas holiday, if you put your surplus income in a high interest savings account it can grow with the power of compound interest while still giving you access to these funds when required.

You can set up a separate savings account and name it your planned expense such as “Holiday Account” or “My New Car” and arrange for a direct credit of your surplus income each pay cycle. It can be very satisfying to see your savings grow knowing that with each deposit you are closer to reaching your goal.

Tips – Some internet savings accounts can offer higher interest than traditional savings accounts. If these accounts don’t provide ATM access it can help you avoid the temptation to access these savings for other purposes.


There are many ways you can use your surplus income to accumulate wealth and save. Most importantly though is to have a plan and stick to it. Small regular investments can add up to large saving over the long term.