Do you remember those days when you would neatly budget all your money? You would know how much total income was coming into your household and measure that against your expenses? The resulting difference, if a positive number, was called discretionary income. Well, it was all a lie. All of it.
Let’s start from the beginning. For most of us, our earned income job was our only source of income. That was me for the first 20 years of my Marine Corps career. My typical payday consists of the military taking out my TSP (401k) contributions pre-tax and sending me the rest of my money post-tax.
I pay all of my expenses from this pot of remaining money, including utilities, debt service, food, and extras. Whatever remaining money was considered our discretionary income—this was money that we could do whatever we wanted with, including spend on hobbies, fast food, vices, and entertainment.
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Indeed, the official definition on Investopedia is extremely similar to what I just wrote before I looked it up. “Okay, okay, Josh, what’s the point?”
The point is that everyone tells us that it is okay to spend money directly from our earned income paychecks. The average worker is going to work to pay for expenses, liabilities, and vices. When we spend money on these things, we don’t create additional money. We are literally burning our cash in the most oversized furnace of all time, consumerism.
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In the article “What would your life look like without a paycheck?” I asked everyone to remove the earned income paychecks from their budgets. What money was still coming in regularly? For most people, nothing was coming in monthly. They were broke. Do you know what was still coming in monthly? Bills! They are like the Terminator; they will never stop.
And that is the actual lie of discretionary income; it makes us believe that we are doing the right thing, following the proper guidelines. When we do our nice, tight budget, and we have remaining money, we feel great. We may even save up for a vacation, take the family out to dinner, or go to a ball game. We have made it—we are living the American dream.
Lies, lies, lies. This version of the American dream keeps you working until you are age 65 or older. 40-50 years in the workforce with only a couple of days off a year. Do you want to visit your adult child and grandkids—put in a leave request? Not feeling well today—better bring in a doctor’s note.
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If we aren’t supposed to spend our discretionary income on things we want, what are we supposed to buy? ASSETS. Lots and lots of assets.
An asset is anything that puts money into your pocket. For most of us, our first assets will usually be in the stock market. However, they can be bonds, cryptocurrency, real estate, etc.
In fact, the only discretionary money you should be spending is income that your assets produce for you. Yes, that is your true discretionary income.
But Josh, I am only receiving $5/month from my dividend stocks; that is all I can spend on myself? Well, at least you can buy a couple of candy bars. I know that it may sound harsh, but this is how the rich spend their money.
The importance of buying assets first before spending discretionary assets is that you now have a life-sized buffer. You have something that will keep producing you money, even when you don’t have an earned income job.
Three essential life elements come from buying assets; you are gaining financial education, increasing your overall income level, and making yourself financially independent.
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Let’s look at an example of buying the monthly-paying REIT called AGNC on the stock market. We would like to get our AGNC position to pay us $200/month.
1) Increase financial education. AGNC is yielding a 10% dividend, which means that we would need $24,000 invested in AGNC to get to the level we would like. How did I get to this number?
2) Increasing overall income level. As you start to achieve your goal, you will feel that your overall wealth is growing. That is because it is! Even when you are receiving $50/month from AGNC, that is money you can spend on something nice. In the world of dividends, $50 is a lot of money. You will come to appreciate that amount of money after you get your first $0.25 dividends.
3) You are becoming financially independent. It may not seem that $200/month can set you free because it can’t. However, you are much closer than you were. Remember, $200 can probably pay 2-3 bills per month. Even if your job went away, your $200 would still be coming in passively.
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And that is the truth behind the lie America sells us throughout our lives. America (and now the world) thrives on consumerism. We all want instant satisfaction—faster, easier, and now. Right at our doorstep in 24 hours.
But if you were to focus entirely on building up your passive income and becoming financially independent, you would be free. An amazing thing happens when you begin your financial independence journey; you stop caring about stuff.
Yesterday, I bought the laptop I have wanted for over one and a half years, the Samsung Galaxy Chromebook. It was 50% off and cost me $500. It took me over 30 minutes to stare at the screen before I bought the device.
The whole time I was buying, I was thinking about what passive income I could purchase instead. It is challenging to spend money on yourself once you start your journey. You will appreciate every penny that comes into your household.
For reference, my wife and I make roughly $3,000/month passively through royalties, rents, dividends, and cryptos. Even with that money coming in passively, the value of reinvesting it into income-producing assets
is completely addicting.
Finally, I knew that I could write more blog posts and be more efficient as a writer having a sub-two-pound laptop always near me. So I bought it—the first major discretionary item I have purchased for myself in roughly two years.
Life is good, but it is even better when you don’t have to work. By focusing on obtaining assets, you will set yourself financially free. Don’t worry; if you do not have “discretionary income” to buy assets, you can create them. Read the articles “Create” and “How to Build Passive Income from Royalties.”
In the end, don’t fall into the discretionary income trap. Assets are your top priority. Once you have enough assets, you will have enough money to buy whatever you want. However, by that time, you probably won’t want to.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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