Wednesday, December 13, 2006

How Much Money Do I Have? The Concept of Discretionary Income

All the bright-eyed 17 to 19 year olds in the huge auditorium were asking questions like, are blue chip stocks as good an investment as they once were? and Is property a better investment in this economic climate? but I just had one simple, burning question for the money guru: how do I figure out how much money I have? Bits of money are coming in and going out at all different intervals, and it is bewildering! My rent cheque is every month, but my graduate award money comes in a big chunk in september and january. Then my TA pay is spread over 7 months. I definitely can't just look at the number in my bank account: most of it might be earmarked for a big withdrawal, for tuition say, the tuition that changes every term!

He looked a little impatient, but spat out the following great advice: pick some span of time for which your big expenses and earnings are fairly predictable. Could be the next 12 months, 6 months, or in my case 8 months. Add up your earnings over that period, and then subtract your fixed expenses. Then divide by however many months. That's your discretionary income! That's the money you make a conscious decision how to spend each month.

In my first calculation, I included for expenses my tuition, and rent (which in my case includes utilities, phone bill and internet), but also a few other expenses I knew were fixed: my regular laundry bill, my membership, and a monthly grocery budget, which I estimated by looking at the last year of interac payments to grocery stores. I just tonight made a second version of this discretionary income, adding in my B.C. Provincial Health care payment, an estimate of how much I spend on photo developing and stationery every month, my fancy new haircut expenses, my cellphone, and my allergy medication. I put it all into a microsoft excel spreadsheet, so that I can see the calculations laid out, and so that if any of the numbers change I can easily recalculate. (one tip: if something goes over say 5 weeks, like my haircut, just divide by 5 and multiply by the average weeks in a month, which is 4.34)

Now I've got a number, my discretionary income for the month. This is great, because it makes possible again all the good financial concepts you had when you were a kid, with just a piggy bank: saving up for things, waiting for your allowance, not being able to afford things, giving up something so you can buy something else. (one way to see just how much something will set you back is to look at it in terms of percentage of your discretionary income, and compare it to other things. Can be surprising!). And then, if you decide to chop off a bit more to save for the long term (what do they recommend? 10%? 20%?), and maybe an emergency fund, you can feel totally free to spend *all* of what is left.

Though you probably learn this in the first day of Accounting 101, it was a big revelation for me: not only does this mean more confidence when I pull out my wallet, but I probably will actually spend more - or at least splurge, and economize, on the right things, knowing where it counts. (hey why not spend the extra dough for the *good* jam - 0.1% of my discretionary income is not going to kill me!)

In a future entry I'll talk about the way I use my PDA to conveniently track basically everything I spend, and some nerdy but neat and useful things you can do with that.

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