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
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 s