Discretionary income is any income you have after you've already taken care of your bills for the month. It is not constant because bills can vary from month to month, so you might not be able to pay for the same items with your discretionary income each month. Even though you can use this income "at your discretion," using it to pay for investments and related expenses can be a wise financial move.
Essentials include basic items like soap, toilet paper and clothing. Often, people buy these items as needed, including them as part of their regular budget. This is not necessarily bad, but when you have some money left over, it may be to your benefit to stock up on essentials that are on sale. Doing this is a form of investment because of the savings it can provide over time. Coupling sales with coupons and store rewards sometimes even can get you items for free.
Sometimes items you always wanted can also be a way to generate income. For example, if you are a musician, your discretionary income might go toward piano purchase. If you then give piano lessons, you'll eventually work off the cost of the instrument and have an asset that you later can sell if desired.
Many forms of investments have fees or require a minimum starting investment. For example, the minimum amount required for a certificate of deposit often is $1,000, as of the time of publication. Similarly, brokers charge fees to sell your investments or buy them for you. These are not considered part of your regular expense budget because when and how you invest is up to you, and because the fees are not necessarily reoccurring. Your discretionary income can cover these expenses so that you have greater flexibility in how you invest.
Trying to invest your money only really works if you know what your risks and investment options are. Putting some of your discretionary income toward learning about investment ultimately may mean gaining back all of what you spend plus additional monies. Investment education can take many forms, as well, so you can learn in the way best suited to you. For example, you can use your discretionary income to pay for a session with an investment or financial adviser, take business and investment classes, purchase investment texts or subscribe to investment websites and print publications.
Another good use for discretionary income is paying extra on the debts you are paying down. This is a good investment strategy because, mathematically, overpayments reduce the amount of interest you pay on the debt overall. It also means you get out of debt faster and therefore have even more discretionary income available to put into other investments.
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