What is discretionary income?
This is a question which is important to those who want to balance their household budget. As most people know there are two categories of spending; your needs and wants.
Here is a list of expenditure which can be classed as needs.
Power/heating
Rent/rates
Food
Car expenses
Clothing
Loan repayments
Savings/investments
Some of these items you have some control over. For example you have the ability to choose how much you spend on food. The same is with clothing. You have the option of shopping around for something affordable. You also have control over how much power you use.
Wants are items which are not essential but are optional. Here is a short list of items which are wants:
Holidays
Hobbies
Entertainment
Gambling
Alcohol
Cigarettes
It is what you do with your discretionary spending money which will make a difference to your financial outcome. If you use your money as a seed for your investments then money worries can be a thing of the past. Dental and Medical bills are not cheap and the wise person who sets aside funds for a rainy day can pay for these emergencies in full.
Your personal financial situation will determine what you do with your discretionary spending money. If you have your life ahead of you then you may have more disposable income after your bills have been paid. If you are older you may not have as much disposable income but have more savings behind you.
If you have consumer debt then you do not have any discretionary spending money. Your number one priority as far as your finances are concerned is to pay off that debt.
It is not how much you make which determines your financial outcome but what you do with how much you make. Some people spend all of their discretionary spending money and are left with nothing until the next pay day.
Here are some stories:
When I was a teenager we were helping a neighbour build a cattle yard on his farm. My father said to the neighbour, “There is no profit in having the best looking cattle yard.”
What he means is that having the nicest looking cattle yard is not going to make any difference to the bottom line profit of the farm.
Years ago, a colleague bought a car for twenty grand. When one of his friends told me, I replied, “If that was me I would have just bought the cheapest car and invested the rest of the money”.
An expensive lifestyle proves costly in the long term. Those who have developed the habit of living modestly are better equipped to deal with the cost of living crisis.
At the end of the day you make your choices and your choices make you.
About this article
The information in this article is of the writer’s opinion and experience and may not be applicable to your personal circumstances therefore discretion is advised.
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