If you were asked to define the term “disposable income” how would you go about it? If you’re thinking it’s the amount of extra cash you have after paying off bills you’d better think again.
When you hear the word ‘disposable’ most people automatically think of trash. So, for one to think disposable income is ‘throw-away’ money kind of makes sense. But this is not the definition. Disposable income is actually the amount of money you have left after paying income taxes. That’s the simple explanation.
On the other hand ‘discretionary income’ is the money you have left after taking your disposable income and subtracting any necessities. For example, say you make $100,000 a year. Now take away 25% for income taxes. That leaves you with $75,000. Now pay your rent/mortgage, food, transportation, etc. and whatever is left over is your discretionary or ‘throw -away money’. If you’re interested in having a bright financial future, this is the money you can use for investments. If you haven’t realized yet, discretionary income is what most people confuse disposable income with.
When looking to start a business it’s wise to try your best to begin using discretionary income. This way you keep yourself from running the risk of leaning on credit cards which can often land you in a pile of massive debt. Think about it. If everything doesn’t go perfectly as planned you’re on the hook for the money you borrowed. Common sense, but not a common practice, unfortunately.
When all is said and done, and the numbers are getting crunched, would you rather risk losing the money you have to pay back or some ‘throw-away’ money that was probably going to go down in value due to inflation if you tried to save it anyway?