Discretionary Income : choose your path

Let’s start of by defining discretionary income. It is a big word but a pretty basic concept. Discretionary income is defined as the amount of an individual's income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of.

This basically means taking care of your needs before you worry about your wants. Now we have all been in situations where we have had to choose between what we need and what we want. For instance you need to pay your mortgage or rent but you want to take a vacation. You cannot have both and as grown ups we understand that we need to pay the rent and delay the vacation. Part of growing up is learning how to delay gratification and developing a sense of self-worth. How well we develop these two behaviors goes along way toward satisfying our basic needs and clarifying our wants from life.

The choices we make with our money are inexplicably tied to our behavior. Noted psychiatrist Dr. William Glasser developed “Rational Choice Theory”. Rational Choice theory postulates that people calculate the likely costs and benefits of any action before deciding what to do. The benefits of taking a vacation do not exceed the cost of losing a place to live. Like Maslow’s hierarchy of needs, Rational Choice theory believes humans are driven by the basic need for survival and the psychological needs of belonging, power, freedom and fun. So discretionary income is the money we have after we have taken care of our basic needs and is used to satisfy our psychological needs of belonging, power, freedom and fun. So once we have some "extra" money our goal should be learning how to effectively utilize discretionary income toward a better life. How does one effectively utilize discretionary income toward a better life? The first step is to understand the choices you have with discretionary income. To illustrate this I have created a road map named the Money Quadrant. Its purpose is to show the four basic paths you can choose with your deiscretionary income.

• Shopping
• Saving
• Gambling
• Investing

So which path do you choose to help satisfy your higher needs of belonging, power, freedom and fun? The choice is all yours. However it is my hope that you choose to channel the majority of your "extra" money toward Investing. Investing is the only choice that will create wealth and afford you the luxury of making choices without the undo restraint of a empty bank account.
With wealth you will more often do things because you want to not because you have to.