According to Investorwords, discretionary income refers to “The amount of an individual’s income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of.” Few individuals and families recognize the importance of this leftover money and squander it away on impulse purchases like magazines and overpriced coffee. This type of spending is unnecessary and can cost a person a fortune over the course of a lifetime. Having a solid financial plan requires a number of things. One of them includes wisely using your discretionary income.
What’s the Use of a Budget If You Don’t Have a Plan?
As mentioned before, a budget should include all of your monthly expenses. This includes every recurring bill in your household. It can also take account of flexible items like savings, vacations, and home improvement projects. You can even reserve a set amount for emergencies. This amount can be increased if you are given a promotion at work or receive a larger-than-usual tax refund.
Discretionary income, on the other hand, fluctuates depending on the circumstances. It, like fixed income, should be accounted for. In today’s economy it is often better to be safe than it is to be sorry. Things that were once valuable, no longer hold the same type of appeal. A night at the movies may be fun for a family of five but it seldom is cost efficient.
Putting Your Money to Good Use
Here are some ways you can take what is left over from your monthly budget and really make it matter:
- Build up your savings account. Although this may seem like a no-brainer to most, few people are truly prepared for unemployment when it comes. Rather than be at mercy of the government to feed your family, have enough money stashed away to cover your expenses for at least six months. Since few families can save this type of money all at once, gradually increasing the amount allotted for emergency situations can mean the difference between paying your mortgage or car note and not. Open a savings account that has one of the best interest rates around.
- Stock up on “essentials” when they are on sale. Have you ever walked into the store, found one of your favorite brands on sale, and realized you didn’t have the type of money on hand to stock up on it? Discretionary income is great for this reason. Coming prepared with an arsenal of coupons, plenty of cash, and a positive attitude can make all the difference. Just remember not to buy more than you can use or you will really just be wasting your money.
- Buy your clothes in the off season. Buy your winter clothes during the spring and your summer clothes in the fall. Hold off on purchasing items at the start of each season. That is when they are the most expensive. If you are buying items for children, consider going up one size to assure that they will fit when the time comes to wear them. (My mother and grandmother have been doing this for years and they really have a wardrobe to be envious of!) You may not always get the absolute latest design, but the money you save will more than offset that.
- Invest in tools that will help earn you side income. Although it may not be something you need immediately, the right tool can help you earn side income. For example, although a sewing machine may be considered a discretionary expense, it can help you earn side income as long as it is operational. If you enjoy sewing or making crafts this side income can be used for other things which make this purchase an investment rather than an expense.
- Spend some money that will help you advance in career. Buy a book, take a class or attend a conference and maybe even use these expenses as a tax deduction. Obtaining industry knowledge and professional know-how can help further your career which makes the money that you spend on these items work twice as hard for you. Check with your employer to see if they offer any opportunities within the company, but if not, seek out a few local events on your own.
Through careful planning and strict spending of your discretionary income, you can achieve everything you set out to do as a single person or family. Just keep in mind that everyone’s goals may not be the same. Make your budget reflect your own interests and values and keep track of every penny that you spend. This will make you what I call a “wise investor.”
Charissa is into frugal living and saving money.
Go ahead and splurge on that fancy coffee and movie tickets. Discretionary income is also meant to give you some joy in life...The key is moderation.
My top five list would look a little different:
1. Save it: Put it in your emergency savings fund, retirement savings, vacation fund, etc.
2. Pay down debt: Especially with today's savings interest rate levels, pay down your credit card, loan and even mortgage debt.
3. Invest it in a low-cost mutual fund, increase your 401K contributions, etc.
4. Upgrade it: Spend extra income on energy-saving projects that will pay off in the long run like switching to CFL bulbs, adding insulation, upgrading an outdated appliance, etc.
And I'd go with your #5 over stocking up on things you don't need.