Tips & advice on getting your finances back on track.
Discretionary income is the money available for you spend on things you want, rather than things you need. Investopedia defines it as “the amount of an individual’s income that is left for spending, investing, or saving after paying taxes and paying for personal necessities, such as food, shelter, and clothing. Discretionary income includes money spent on luxury items, vacations, and non-essential goods and services.”
If we take a closer look at this definition, there are two basic rules hidden in there on how to handle discretionary income.
Rule 1: Pay for your necessities first
The first rule is that you need to pay for your necessities before you start deciding which new shoes you’re going to look great in on Saturday night. Discretionary spending comes after you have paid for your housing, utilities, food and all other basic life needs.
The easiest way to get your mind wrapped around the exact costs of your necessities is to start with basic budgeting. A budget will help you to learn where your money is going. You can use a purpose built app like Mint, a spreadsheet, or even pencil and paper. Start with writing everything down that you pay each month. Don’t forget items that you pay annually, like car insurance, or if you will have a tax bill to pay. Account for all of these annual items in your budget, setting a little aside each month.
Find your discretionary income
Once you have your budget, search through it to see where you are spending a surprising amount. Did you know that your $5.50 latte each working day was adding up to around $1,400 each year? You may enjoy your morning coffee fix, or you may decide that those funds could be put to better use elsewhere.
Take a look at your credit cards to see how much you’re spending on subscriptions. Subscriptions can really tap into your monthly income. Are you using all of those subscriptions? Can you live without some of those services? Remove all of the unnecessary expenses from your budget.
Regularly check-in with your budget, I’m talking at least once a month, to keep you on track and help you avoid gradual ‘lifestyle inflation’ that can eat into your funds unnecessarily. By monitoring your budget, you’ll be able to see how much money you have ‘left over’ each month. This is your discretionary income.
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Rule 2: Being smart with your discretionary income
Now that you’ve determined your ‘extra’ money…time to spend!! Well, not so fast. The second hidden rule in the definition of discretionary income is that it is to be used for ‘spending, investing and saving’.
Have you ever heard the adage “Pay Yourself First”? Once your bills are paid each month, set aside a portion of your discretionary income in a savings or investment account. If you have this done automatically each pay period, it will be spending money that you will never miss. Instead, it will be there if and when you need it. This is a great strategy for building an emergency fund, saving for a large ticket item like a new refrigerator, or starting an investment account.
Read More: How To Think Like A Millionaire In Your 20’s
Discretionary debt busting
If you have any debts, they should have been included in your budget as a necessity. After you have paid yourself first, you may choose to pay a little extra off your debts each month. Steady and persistent extra principal payments will have a dramatic effect over time. It will reduce not only the amount of time it will take you to pay off your debts, but reduce the amount you pay in interest over the life of your loan. This is a solid long-term strategy for becoming debt free.
This seems like a long list of things that use up your monthly income before you get to the ‘fun stuff,’ but you’ll appreciate those luxury or bonus items that you do choose to buy a little bit more with the knowledge that your financial life is taken care of.
How you spend your discretionary income is a choice. You decide where your financial priorities lie. We at Navicore Solutions urge you to take control of your finances by starting with a budget so you understand what your spending limits should be on a month-to-month basis. If you feel like your finances are overwhelming, try a credit counseling session with one of our Certified Credit Counselors on 1-800-992-4557.
Lori Stratford is the Digital Media Manager at Navicore Solutions. She promotes the reach of Navicore’s financial education to the public through social media and blog content.