7/30/2023 0 Comments Discretionary expenseBut when you're older, perhaps out of college with an established career, your income and debt obligations would be much different. For example, the after-tax income you earn from a summer job in high school might be entirely discretionary because you're most likely relying on parents to cover bills and other expenses. Any nonrecurring cash expenses wouldn't be captured on your personal income statement - that would instead be recorded on the cash flow statement, which is a separate financial document.ĭiscretionary income not only varies from person to person, but can also change over time. Variable expenses would be vacation or entertainment expenses. Note: The income statement would also capture variable and fixed expenses as well. From there, you can make decisions on what to spend and what to save and invest to maximize your discretionary income. Income - savings - expenses - taxes = net discretionary cash flowĬalculating your net discretionary cash flow is key to understanding how much money you have after you've met all your debt obligations. This represents the amount of cash flow available after all expenses, savings, and taxes have been paid. Once you have all your information recorded on a personal income statement, you can calculate what's called your net discretionary cash flow. Savings contributions would also fall under the expenses category and would include contributions to any type of savings account or retirement account. Examples of recurring monthly expenses would be mortgage, taxes, internet, or insurance. Note: Crucial expenses that don't go away, such as your rent or electricity bill are considered "non-discretionary expenses."Įxamples of income recorded on this statement include your salary, interest, dividends, pension, or any business income received. This is an important financial statement that will show all income earned (or expected to be earned) within a certain time period, minus any recurring, monthly expenses. It's used as a metric by economists and government agencies to determine how the economy is doing.Īs mentioned before, discretionary income is simply your income, minus any taxes and non-discretionary expenses.Ī great way to get a true look at your discretionary income is to work with a CFP® or other financial professional to put together a personal statement of income and expenses - also known as a personal income statement. It can be distilled down to a single number.ĭiscretionary income is used to determine how much you should save and how much you can spend. It's more useful to consider discretionary income as a percentage of your budget. Discretionary income takes both taxes and cost of living into consideration.ĭisposable income is your income left over just after taxes.
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