By understanding the three ‘D’s of the financial world – disposable income, discretionary income, and debts – individuals can gain a clearer perspective on managing their finances and achieving a balanced financial future.
An individual’s income and his/her financial status or well-being are invariably dependent on income. A consistent income guarantees an uninterrupted functioning of various financial commitments such as retirement plans, loans, mortgage/rent, savings, paying off debts, and so on. Accordingly, your lifestyle too changes as factors like affordability are within reach and expenses get scattered.
Each of the ‘D’s are interrelated and determines your financial health based on how well you balance them to stay in the game.
Income: An Under-utilized Lifeline
Income is a critical component of the financial world and everything revolves around this with very limited options for the common man to think beyond it.
It is often considered as a source of survival and its continuity is misinterpreted as a one-time solution for all financial matters which is not true and there is a lot of scopes to categorize income for the future.
Understanding The 3D Of The Financial World
The 3’D’s are common terminologies that you hear on a day-to-day basis yet we fail to recognize their significance until a shortage of funds begins to appear frequently.
Money that is left out after you pay taxes is referred to as disposable income.
Disposable income = Personal income – Personal current taxes.
A more simple way to define disposable income is the money left over from your wages or salary after you’ve paid federal, state, and local taxes. These taxes consist of property taxes and Medicare, paycheck deductions for Social Security, and unemployment insurance which are a saving grace during the pandemic.
Whatever is left of your disposable income is discretionary income – meaning, after you’ve paid for necessities like rent or mortgage, food, healthcare, transportation, and electricity.
Discretionary income can also include income spent on investments, restaurants, travel, entertainment, and any other services or non-essential items. The expenses are purely intentional and stand out from your actual financial plan. However, this part of the income has a great impact on the third ‘D’ – debts.
Debts – A Vulnerable Financial Parameter
Discretionary income when used uncontrollably result in debts that haunts you and thwarts your savings plan. Debts are right behind you whenever your income is emptied through discretionary expenses and hence needs more attention.
When you allow your debts to take over your income then it pushes you into adopting a debt consolidation plan which is not advisable to tackle your debts.
What Is Debt Consolidation?
When you are surrounded by a number of debts then it becomes difficult to keep a track of each one with varying amounts and interest rates. Debt consolidation eliminates that by using a single loan to take care of multiple debts and simplifying it for repayment. One for many is the idea behind debt consolidation.
What Are The Drawbacks?
Debt consolidation requires you to pay additional fees depending on the method you opt like origination fees in case of personal loans and closing costs for mortgage-related loans and lines of credit.
While debt consolidation lowers your overall monthly debt payments it can cost you more in interest due to the lengthened repayment term. Some loans ask for your home as collateral and even worse some may not even qualify for an interest rate that’s way lower than your existing balances.
In short, debt consolidation doesn’t help you in decreasing the amount it restructures your entire debt into an affordable monthly repayment.
How Do You Create A Balance?
Disposal income is the first line of savings that safeguards your future for an unexpected situation like the current pandemic or job loss where people are applying for employee benefits to keep things moving. But this is an involuntary process where your hands are tied up to access your income completely unless there is an emergency.
The major effort lies in managing your discretionary income that is susceptible to spending on things with less or no importance. When you start tracking your expenses and tighten it, the results are clearly reflected in the savings from discretionary income.
Discretionary spending can be curbed to a great extent by using an emergency fund through which daily expenses like groceries can be paid off with no interest.
The Impact On Debt
Debts gain more attention and commitment when the discretionary income is mismanaged and force you to borrow money eventually ceasing all your financial strategies. All debts are not bad mind you but preventing debts from piling up should be your main aim as they deter the accumulation of funds in your accounts.
Everything that we look at is 3-dimensional because that is how our eyes have evolved adding visual depth. Similarly, you need to look in-depth at the 3D’s of the financial world for a clear vision of what lies in front of you financially.