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Below the Line: Putting Discretionary Income to Use in Advancing Your Goals

This blog is devoted to the power of discretionary income, or what I like to refer to as “below the line” money. For years I have been a firm believer in putting discretionary income to use in financing my goals versus blowing it and having dreams deferred. In this blog, I explore the definition of discretionary income and provide examples of how it can be used to advance (and fund) important goals.

What is Discretionary Income?

Discretionary income, as a simple definition, is the money left over after all monthly expenses have been accounted for. In a nutshell, you can use this money at your discretion. Here is a simple example of a single female who makes $3,000 per month.


Monthly income: $3,000

Monthly expenses:

  • Rent - $1,000

  • Utilities - $239

  • Cell phone - $115

  • Groceries - $170

  • Fuel and transportation - $115

  • Car note - $250

  • Car insurance - $117

  • Household effects - $100

  • Entertainment - $200

Total expenses: $2,306

Discretionary income: $694

You calculate your discretionary income by subtracting your total monthly expenses from your total monthly income ($3,000 - $2,306 = $694). At the end of the month, the young lady in this example has $694 to use at her discretion. While nearly $700 may not seem like a lot of money, when you put this discretionary income to work for you, you will discover new possibilities.

What Happens Below the Line?

Whenever I am working with a client on their R.E.A.L.I.S.T.I.C Budget, I always provide both general and specific recommendations for how they can use their discretionary income to advance short-, medium- and longer-term goals. Even if/when my clients’ budgets do not allow for making the recommended monthly discretionary income savings percentages, I show them the power of starting small.

Monthly Discretionary Income Savings Percentage Recommendations

  • Financial Freedom (Suggested allocation - 10%) – Setting aside a monthly contribution for financial freedom helps you plan for medium- and long-term financial goals. Funds allocated for this purpose are designed for stocks, bonds, mutual funds, etc. For those that contribute to their employer’s 401K or 403B on a pre-tax basis, you can count those contributions as part of the 10%. For example, if you contribute 5% to your employer’s 401K plan, you have a remaining 5% (to total the 10% recommendation) that can be used for investing. The beauty of this example is that your contributions to financial freedom are being made both on a pre-tax and after-tax basis. This allows you to benefit both now and later. Monthly savings (using example above) – $69.40

  • Longer-term Savings for Spending (Suggested allocation - 10%)Wondering where to put those funds for emergencies, saving for that next vacation, or saving for a costly repair to your vehicle? You guessed it; those funds go here. By setting aside an allotment each month for those projects that require you to save over a longer period, you will be prepared when the time comes. Monthly savings (using example above) – $69.40

  • Charitable Contributions (Suggested allocation - 10%) Consider making charitable contributions to churches or other religious organizations, your favorite non-profit, etc. Why not feed your sense of altruism while reducing your taxable income in the process? Monthly savings (using example above) – $69.40

  • Education (Suggested allocation - 5%) Education is a life-long process and saving for it is wise. Ever found yourself saying, “If only I had the money to go back to school?” Or “I wish I could take that course to improve my performance on the job.” Allocating a portion of your discretionary income to education creates career advancement opportunities that may not have otherwise been possible. Monthly savings (using example above) – $34.70

Even after prioritizing these important savings, there is still $451.11 left over ($694 - $64.90 - $64.90 - $64.90 - $34.70 = $451.11). In cases where you have money left after setting aside the recommended percentage allocations, you can opt to devote even more to your monthly savings in these areas. For example, you could consider allocating $200 towards your financial freedom and longer-term savings line items, $70 towards charitable contributions and $100 towards education. Using these increased monthly contributions/allocations will boost your savings and help you reach your goals much faster.

Consider the example below for boosting your savings:

In the example above, this young lady consistently saved $200 per month for 12 months and was able to grow investment seeds of $2,400 in two savings categories ("Financial Freedom" and "Longer-term Savings for Spending"). She then invested those seeds and, using the same $200 per month (per category) that she was already saving, she now added those monthly contributions to her investment accounts and watched her seed investments grow month after month. In one year, if she invested at 4%, she would have a return of $4,896. If she invested at 8%, it would yield $4,992. And if she invested at 12%, she would have $5,088.

As you can see, putting your discretionary income to work can be powerful in helping to advance your goals. Even if you must work towards a goal for two to three years, slow and steady always wins the race.

Happy saving and investing!

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