Personal Finance: How to Define Discretionary Spending in Your Budget

Money is an important part of life for most people. Unfortunately, many people have all of their income spent before it reaches their hand. Long before it is received, the money has been spent on previous debts, obligations, and necessities.

These people know that when they spend money on a whim or an emergency need, it will be taking money away from another bill that should be paid first. Money that you have the ability to choose to spend after you receive it, is discretionary income. Sadly, many people confuse disposable income with discretionary income in their spending habits.

Know the difference between discretionary and disposable income.

Some people see all money that makes it to their pocket as discretionary income. In fact, it is their money to spend as they choose. In that sense, how it is spent depends on how they want to spend it. The reality is that after-tax money is not really discretionary income, but disposable income.

It is the money that you have that can be used for living expenses, pleasure, and other needs or wants. Discretionary income is the amount of money that you have not already allocated to pay for necessities like food, shelter, transportation, and a variety of other personal, household, and family needs.

Have a budget.

Without a budget, you are only able to guess where the line that starts the discretionary part of you income lies. A budget allows you to segregate the part of your income that must be reserved for fixed expenses and other items that you need. It prevents you from spending money on wants that is intended for necessities. People without budgets tend to fall behind on bills and have their utilities disconnected.

Subtract housing, utilities, and groceries.

Start your budget with these items so that you can at least have a place to live and food to eat. You will have other obligations that need to follow these items into the budget before thinking about having discretionary income. It is best to overestimate unknown amounts in a budget so that you are less likely to be caught short if something costs more than anticipated.

Save some money.

Unless you have enormous sums of money sitting idly about, you should plan to have an amount set aside for saving as a budget item. Determining the precise amount can be a little tough at first. You need to find the line between saving too little to matter and saving so much it hurts. It is important that you save a consistent amount each month.

Pay for items that you consider necessities like insurance, personal care, and transportation.

There are other expenses that cannot be overlooked in a responsible budget. You will need to pay for some types of insurance, transportation expenses, clothing, and other things that are considered necessary for living and lifestyle. Add these into your budget and subtract them from you income. Try not to miss anything that you regularly spend money on. Also, subtract any type of payments that you are obligated to make each month.

The leftover portion is discretionary income.

At last, you have reached the last line of your budget. Subtract your monthly expenses from your monthly income. If there is a positive number left at the bottom, you have discretionary income. At this point, you may choose to break up the discretionary income regarding how you want to spend it or leave it as a lump and plan on putting in your pocket to carry around.