Twenty Something Sense

How much do you make a year? For 91.9% of us a number immediately flashes into our heads when asked that question. Try this one. How much money do I have for discretionary spending this year? The majority of people can not answer this. This is troubling to me. If you don’t know how much money you have this year to spend on discretionary items such as bars, travel, dinners, electronics, clothing, etc… then how do you know what you can and can’t afford to have? You have no tangible information that forces you to make trade offs and choose one or the other. For most of us, this is how we end up in debt.

Avoiding this debt trap is not all that difficult and requires the completion of a very simple exercise that will calculate how much discretionary spending money you have for the year.

The first step is to calculate your estimated taxes for this year. In order to do this you will need to first calculate your Taxable Income. For simplicities sake, my calculations below all assume that you are 1) Single, 2) Renting, 3) Make under 100k, and 4) Do not itemize tax deductions over $5,700. For those that do not fit my assumptions feel free to post a comment about what is different in your situation and I’ll gladly try to offer a hand.

Taxable Income Equals

Gross Income
- Traditional 401(k) contributions
- Other Tax Write offs
– $5,700 (2009 Standard Deduction)
Taxable Income

Now you can use your Taxable Income to calculate how much you owe the government in the five major tax areas.

• Federal Tax – Enter your taxable income into the calculator on this page to get your 2009 federal income tax total. http://www.moneychimp.com/features/tax_brackets.htm
• Medicare – 1.45% multiplied by your taxable income.
• Social Security – 6.20% multiplied by your taxable income.
• State Tax – Google your state name and tax for help calculating this number. Keep in mind that some states do not have income tax.
• Local Tax – Google your locality name and tax for help calculating this number. Keep in mind that some locals do not have income tax.

Alright, hopefully you are still with me. Now that you have these tax numbers calculated, the rest is a breeze. Lets start back at your Gross Income and try to calculate your Real Income.

Real Income Equals

Gross Income
- Federal Tax
- Medicare Tax
- Social Sec Tax
- State Tax
- Local Tax
- Rent (Yearly)
- Utilities (Yearly)
- Groceries (Yearly)
Real Income

If your Real Income is negative then we have some big problems. For those who still have some money left over lets continue. We need to now factor in all of the money you are saving away before we even start to think about spending. Whatever we are left with is our discretionary income.

Discretionary Income Equals

Real Income
- 401(k) contributions
- IRA contributions
- Personal Investment Savings
- Emergency Fund Savings
- House Savings
- etc… (it’s a finance blog, of course we’re going to promote savings!)
Discretionary Income

Now this discretionary income number is the amount of money you are able to spend on your own choosing this year. This is the number that determines what you can and can’t do and should really be the number you focus on growing each year, not your income.