What to do with the extra money you have at the end of the month. That’s called Discretionary income. Disposable income is a person’s take-home pay used to meet both essential and nonessential expenses. Discretionary income is what is left over from disposable income after the income-earner pays for rent/mortgage, transportation, food, utilities, insurance, and other essential costs.
Discretionary income is the amount of an individual’s income that is left for spending, investing or saving after paying taxes and paying for personal necessities, such as food, shelter, and clothing. Discretionary income includes money spent on luxury items, vacations, and nonessential goods and services. Discretionary income is the first to shrink amid a job loss or pay reduction. You don’t go out to dinner, forego the spa or manicure, and stop going to Starbucks.
What to Do with the Extra Money You Have At the End of the Month
You really have three options:
- Spend it – There is nothing wrong with using the extra money eating out now and then but to make it a consistent habit will keep you from moving forward and kicking your financial gears into overdrive.
- Roll it Over – If your budget calls for spending $100 on clothes and you didn’t buy any clothes, then next month you can spend $200 ($100 from the prior month + $100 from current month = $200) . If you never buy any clothes, then this category grows too large.
- Redirect it to your biggest need –
If you are paying off credit card debt, then all the money you didn’t spend in the budget should go as extra to pay off the credit card
If you are building your emergency fund or saving for a down payment, then all the money you didn’t spend in the budget should be used to grow that even faster.
And if you are funding retirement or the kid’s college through investing or saving for that special vacation, let the extra budget money flow into those categories.
The key in the process is to know where your money is going and then have a budget. “A budget is a spending plan, not a license to spend, “ says Brian at Luke 1428.
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