6 Tips for Using New Disposable Income

Recently, an Ask Metafilter reader announced he is earning enough money to feel rich, with disposable income for the first time in his life. He probably meant discretionary income. If you want to get technical, to have disposable income is everything you earn minus required tax payments. Everyone has disposable income. Discretionary income, however, is what you have left of your income after you subtract your taxes and your necessary expenses and obligations.

I remember having discretionary income for the first time. For a few years out of college, I worked for a non-profit organization. It was emotionally rewarding — occasionally — but it was a financial disaster. I lived a great distance from the job, and I worked constantly, including weekends. I was exhausted from work and travel, but sleep outside of work was not part of the organization’s philosophy. It’s no surprise that most employees lasted no more than a year or two. I beat the odds by lasting three, and my wallet paid the price.

Even after reducing my rent and living closer to the job, I wasn’t able to afford my necessities. The monthly student loan payments didn’t help. Eventually I left the job, spent some time rethinking my strategy for making a living, and began working at a large insurance company accessible by public transportation. It wasn’t a fulfilling job, but I got to work with some smart people, although for a short time.

With my housing costs low and a much better income, I could do more than just pay my taxes, rent, and debt payments. I could save money for retirement and for shorter-term goals, something I wasn’t able to consider while working for the non-profit, going deeper into credit card debt each month just for my necessities. I could use savings to enjoy my life outside of work, and though I still worked much more than 40 hours a week at the new job — overtime pay was wonderful — I could make time for myself.

When you finally have discretionary income, the world opens its options to you. With a growing balance sheet each month, like the growth I was able to show on Consumerism Commentary every month starting in 2003, you start to feel wealthy. After all, if you’re growing your savings, you are doing better than a good portion of the American public.

Here are some suggestions for what to think about once you have discretionary income.

1. Don’t increase your spending to meet your income.

There is going to be a strong desire to increase your spending on unnecessary things once you see that you have money left over each month. And if your goal is to “feel rich,” this increase in spending is tempting. You’ve worked hard, so you deserve some luxuries, that’s certain. Resist the temptation to spend more, and don’t allow your expenses to creep, at least not at first. You’ll need to make some choices first.

Although you might have done a good job of spending less than you earn, and there might be more headroom for doing the same even after increasing your spending to match your income, your goal should be financial independence, and the path to reach that goal is to use your income to build wealth faster. That can’t happen if you’re spending away your increased income.

Discretionary income opens an opportunity to create a new budget, but consider sticking with a budget even if it feels like you don’t need to. Look at the budget categories that might have been limited previously, like charitable giving. You might have more flexibility before you begin thinking about adjusting your outward appearance to match your feelings of new wealth.

2. Re-evaluate your savings.

It’s one thing to have income left over each month after paying your taxes, debt, and necessary expenses like housing, transportation to work, and food. It’s something much better to have income left over after the same as well as transferring enough into savings. You might find that your discretionary income disappears after putting away $400 a month into savings.

Once you find yourself with a growing net worth each month, determine how much you need to put aside for your different financial targets. If your employer offers a retirement plan, contribute as much as possible in order to take advantage of the full employer matching contribution. If the company offers a dollar-for-dollar match of the first six percent of your salary, for example, try to put aside six percent into your 401(k). You won’t miss the money as much as you think you will.

Put aside money for each shorter-term goal you have. If you want to buy a new house, put aside a healthy amount each month into a so-called high-yield savings account. If you’re aiming for financial independence earlier than the traditional retirement age, you’ll need to save and invest aggressively, and that can take a big portion of your discretionary income.

Everything else is just superficial. Savings won’t make you feel rich unless you like to look at your balance sheet each month. While my income and wealth was growing, I liked that. You might like it, too. Having discretionary income after savings opens some opportunities for changing your appearance. It’s superficial, but that doesn’t mean that it’s bad. For most people, it’s more about confidence. If you want to project an air of success, society expects you to look the part. Unfortunately, people judge others on appearance, and while we shouldn’t worry about what other people think, there’s something to be said for the confidence some people gain when they feel that other people are judging them well. Confidence breeds more confidence, and that can lead to success. It’s a tenuous relationship, but feeling better about yourself — the psychology of identity — can be just as important as reality.

3. Enhance your environment.

When I started earning a consistent amount of money outside of my day job, I decided to move to a new location. I was sick of living in a tiny apartment, though if I were to compare it with a New York City apartment or dwellings in other parts of the world, it wouldn’t really be tiny. It was a noisy area, with neighbors who were not considerate of each other late at night. I moved somewhere where I was more comfortable and had more room. The rent was also about 40 percent more expensive.

Though not at first, I added things that made my life more comfortable:

• A new, much more comfortable mattress.
• A high-definition television — I was a late adopter with this technology, having dealt with an inherited television and a $20 low-quality DVD player.
• Related to the above, I subscribed to cable after may years without the service. Many super-motivated, super-productive people despise television, but I seek out high quality entertainment. There have been a few good options over the years.

There are still changes I haven’t made since finding myself with discretionary income. Except for in the bedroom where I upgraded my furniture, I have mostly the same items I’ve had for a decade. That includes a cheap, uncomfortable couch from IKEA and a cheap coffee table for my living room. The desk I work on is a child’s desk, and I’m not even sure where I got it from or why I have it.

What you enhance is related to your interests. If you spend a lot of time cooking and enjoy it, upgrade your kitchen appliances and implements, as someone on the Ask Metafilter thread suggests.

4. Enhance your image.

There’s usually no need to spend money on designer clothing, but dressing well can help inspire the confidence you want. I’ve never been comfortable in suits, so I’m happy that type of wardrobe was never all that necessary for me. It wasn’t until recently I decided to visit a tailor and have a suit made for me that fits my body the way a suit is supposed to fit. Wearing the custom-made suit made a significant difference in the way I felt and in how I looked.

I still have my 2004 Honda Civic, purchased when I was beginning to be able to afford a car payment (which I eliminated as quickly as possible). It’s a fine car, but it doesn’t inspire an impression of wealth. Personally, I’m not concerned about that, but those for whom image is important or who have a love of driving, being able to afford a nicer car might help you feel successful. I could have spent the cost of the new Honda Civic, $16,000, on a used fancier car, but reliability was important to me at the time, as I could have no car-related excuses for getting to my job on time. I opted for reliability and long-term ownership. But when you have income to spare, more options are available.

5. Make life easier for yourself.

With discretionary income, I was able to solve another problem about my environment. My living space wasn’t always tidy, and I didn’t like dusting, vacuuming, and cleaning the apartment. The fact that I had a cat made these tasks necessary, but I was building a business, and I didn’t want to spend my time on household chores. I hired a maid service to visit every other week to take care of these tasks.

I’m much happier with my environment because of this change. There may be other tasks you can outsource to increase your quality of life. The purpose may be so you have time to work more or because you would just like to spend more of the time you do have outside of work on things that make you happy.

6. Explore your other interests.

For several years, I’ve been enjoying photography. That’s somewhat simple to do without discretionary income. You can buy an inexpensive digital camera, and even if you need to save money for a few months, it’s an accessible goal, and you don’t need to spend a lot of money. I would have been fine with this, but discretionary income has allowed me to take photography classes with an excellent local photographer and to upgrade my equipment to be similar to what professionals use (even if occasionally buying used equipment to save money).

Doing so has opened new opportunities for me. My work is currently on exhibition at the local arts council, and I may be able to sell limited edition prints of my work.

What new opportunities for increasing your feeling of wealth or your confidence has discretionary or disposable income opened for you? What are you looking to do once you do have discretionary income?

Photo: euthman
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