Step 1: Calculate Your Yearly Discretionary Income

Welcome to reality as I like to call this post. This will be the most important post that you will read on my blog in the start here section. After this post you will have a true understanding on how much money you are actually earning each year and how much you have to put towards paying off your debt and investing. I want this post to make you realize how valuable your time is and why you should ALWAYS be asking the question before you buy ANYTHING. Do I really NEED this?

So first what is discretionary income? 

Income remaining after deduction of taxes and basic living costs.

This is money that you choose to spend things such as coffee, clothing and other useless shit you probably don’t need. After you go through this mini exercise I hope you will get an understanding on how much you are actually earning and I hope it is reality check for you to begin thinking about the money you earn differently.

Calculate your yearly discretionary income (Get a pen and paper out)

Let me break it down for you using this Federal Income Tax Calculator (You try it with me):

Click on this link to pull up the Federal Income Tax Calculator. Enter your yearly household income, the city you live in and filing status. This will calculate your income after taxes both state and federal. The example I have used below is based off of this same calculator. As I do have an international audience if you are not from the United States find an online tax calculator for your country and find out which your income is after taxes.

Say that you are earning $45,000 per year. Your taxes in 2018 if you are living in Los Angeles, California for Federal & State taxes will be $8,578. This leaves your discretionary income with $36,422 ($45,000 – $8,578 = $36,422). This is if you don’t pay rent, pay a mortgage, have a car, eat or drink. ALWAYS think of what you make by what you have AFTER taxes not by what your being paid on paper. I will repeat this throughout all my savings posts.

So what do you do with your $36,422? Assuming that you are paying rent if I take the average cost that a person pays for rent at the low end of $1,300 per month in Los Angeles ($1,300 x 12 months = $15,600) this leaves you with only $20,822 ($36,422 – $15,600 = $20,822). Also assuming you own a car and not paying any type of loan against it the insurance costs & gas on average is running you about $200 per month ($200 x 12 months = $2,400) and is costing you $2,400 per year. So that leaves you now with $18,422 ($20,822 – $2,400 = $18,422). Now assuming that you eat food and drink that you buy from the grocery store. If you are on the average side of spending $150 per month on groceries ($150 x 12 months = $1,800) you spend $1,800 a year on groceries. That leaves you with $16,622 ($18,422 – $1,800 = $16,622).

$16,622

That is the amount you are left with assuming you don’t have any monthly student loans, no car loan or lease payment, no credit card bills, no personal loans and no fun. The amount of $16,622 will decrease fairly quickly if you do have these types of bills. So the next time you think you make a certain amount do a yearly calculation of everything to find out what your discretionary income is.

Hopefully you are not depressed after doing this exercise. This should be the first exercise you do so you get an understanding on how much money you actually have to spend/save/pay off debt/invest. I will repost this calculation over and over on each of the start saving posts because I want people to not only do the calculation but to get the point across of how much your actually earning in reality.

The goal of this blog is to help change your mindset and thinking about money to gain control of your personal finances just like I have. Now that you have calculated your discretionary income we are going to aim to increase it. Keep reading through the blog and I will guide you on how we will do this.

“Never spend your money before you have earned it.”
– Thomas Jefferson –

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