Once you receive your payment, the first thing you do is fulfill the mandatory financial obligations; pay the bills, buy the essentials, pay off your debts, etc. Whatever remains, is referred to as discretionary income but you probably refer to it as ‘fun money’ or the few extra bucks you have leftover at the end of each month.
What you do with this money is what’s referred to as discretionary spending. Now, it doesn’t matter how much discretionary income you have, what’s important is how you use that money. It determines what kind of financial future you have; stable or otherwise.
Our goal at CalPATH is to help you save money, but help us help you by following the steps below…
Essential spending vs discretionary spending
Essential spending involves spending money on crucial household expenses either by law (health insurance and taxes) or to keep the household running (food, rent). For these kinds of expenses, you have no option of skipping out on them; you simply have to pay.
Discretionary spending, on the other hand, is spending money on activities and items that you don’t necessarily need. This could be anything from paying for a vacation, buying luxurious items, etc.
Simply put, discretionary spending is often channeled towards things that bring about personal satisfaction.
Things you could do with your discretionary income
Spending your discretionary income on fun activities isn’t all bad but every extra dollar you spend wisely is a future financial investment. Here are tips on how you can use your discretionary income.
- Pay off debts: if you find yourself with extra money to spare at the end of each month, channel some of it towards reducing your debt burden. Give priority to the debts with high-interest rates.
- Invest it: let your money work for you. Yes, taking a vacation is important but watching your money grow is even more satisfying. Prioritize retirement savings as they have great tax benefits1.
- Put it in an emergency fund: the difference between a minor financial setback and total financial ruin is having an emergency fund. How much you set aside in this fund is dependent on your monthly expenses. It is recommended you have at least 6 months’ worth of expenses2 money in your emergency fund.
Discretionary spending within your means
Living within your means sounds like an easy concept but you’ll be surprised to realize most people end up spending more than they earn. To avoid getting into debt, here are tips for sustainable discretionary spending.
- Always work with a budget – you need to account for each and every coin you earn so that you can analyze areas in which you need to cut back.
- Identify wants and needs – before spending on anything, ask yourself ‘is this really necessary?’ The first step to streamlining your budget is understanding your spending behaviors and eliminating non-essential purchases.
- Consider professional financial counseling – if you are struggling to cultivate healthy personal financial habits, seeking financial advice would be the best course of action. It is never too late to begin a financial education.
With a little planning and tracing of your discretionary spending, you can easily climb your way up the financial ladder.
Links to sources used
- Lots of Benefits – when you set up an employee retirement plan – https://www.irs.gov/retirement-plans/plan-sponsor/lots-of-benefits-when-you-set-up-an-employee-retirement-plan
- How much money you should put in your emergency fund – https://www.cnbc.com/2018/06/22/how-much-money-you-should-put-in-your-emergency-fund.html