Discretionary Income

latteI’ve posted with advice about developing your own “currency” to help assign a tangible value to savings. But I want to explore the idea of saving in more detail. I believe that many people underestimate the importance of small savings.

Let’s do some very basic, hypothetical math. Assume you make $50,000/year. With rounding, that’s about $4,000/month, or $1,000/week, or $200/day, or $25/hr, or 40¢/minute, or 7¢/second. 😉 I’m probably going overboard here, but I think it helps.

I know it’s cliché, but I’m going to use a latté in my musings. Maybe you don’t mind working 12 minutes to pay for that $5 latté (especially if you love your job and/or lattés). I, myself, have my guilty pleasures. But I’ve done the math and maybe you haven’t. It’s helpful to know that you now have 480 -12 = 468 minutes left that day to go towards other expenses.

Only, no you don’t.

You don’t really bring home $4,000/month do you? Once all those deductions are taken out of your paycheck (federal and state withholding taxes, social security tax, medicare tax, any health insurance premiums, 401K…), chances are your net income, your take home pay, is closer to $3,000/month. (It’s always so sobering, isn’t it?) So, you’re really making closer to 30¢/minute and you have to work 17 minutes to pay for the coffee.

And, by the way, that latté is a discretionary purchase. But what about all the non-discretionary expenses you have? Rent or mortgage, utilities, student loans, food (you DO have to eat), transportation… People have different non-discretionary expenses, but most of us have recurring expenses that pretty much must be paid in order to live and work in society. For example, after taxes, you have to work about eight whole days just to pay that mortgage/rent of $1,200/month. So, if your non-discretionary expenses total, let’s say, $2,000/month, then that leaves you only $1,000 left for discretionary expenses. That’s $12,000/year.

So, $5 may not sound like much, when it comes to savings, but don’t look at it as a percentage of your gross income. You don’t bring home $50,000. You don’t earn enough money to buy 10,000 $5 lattés/year. Assuming our hypothetical scenario, after non-discretionary expenses, you have the buying power for 2,400 lattés. That’s a lot of lattés, but not nearly as many as 10,000. Because now we are thinking in terms of your discretionary income. In our example,  you have enough discretionary income to buy 6.5 lattés/day. And that’s assuming you don’t want to spend your money to go to a movie, or buy a pair shoes, or take a vacation, or have your eyebrows waxed…

No wonder people are in so much trouble. They’re spending all their money at Starbucks and have no idea why there’s nothing left over.

It’s Your Money or Your Life.

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