Understanding discretionary income (and why it matters)
A healthy financial life requires living within your means, but it’s important to know how much money you have to work with. When you get paid, it’s tempting to see the money that hits your bank account as what you can spend.
However, a big chunk of that is already spoken for to cover essential expenses. What’s left is your discretionary income (the real amount you have left to spend), and it’s a key factor to spending within your means.
What is discretionary income?
Discretionary income = Salary - Taxes & Deductions- Essential Expenses
Discretionary income is what you have left after paying taxes and essential expenses: those monthly non-negotiables, such as food, accommodation, medical aid and insurance. It’s your spending or ‘fun money’ that you use to pay for or buy non-essential expenses, such as holidays or luxuries, but it’s also what you have available to put into savings and investments.
Why is it important?
Since discretionary income is what’s left over, it’s dependent on fluctuations in your salary and essential expenses. For example, if the price of food goes up or your rent increases, you have less money to spend on going out, traveling and other luxuries. Alternatively, if your salary increases but your expenses stay the same, you’ll have more left to put into savings.
You need to constantly review how much you have in discretionary income so that you can adjust your spending to suit your budget.
TOP TIP: Download our Banking App and use the Money Movements add-on to keep track of your discretionary income and your expenses.