I was having a casual conversation with my wife this week when the subject turned to our family’s finances. As we mused about how we are doing financially, I pointed out we are in a better place than last year. To me, that’s progress. Are you making progress in the financial arena? Two of my favorite measures of financial progress are discretionary income and passive income.
Discretionary income is how much money is available to you to spend in line with your values. It is residual income after covering living expenses (food, shelter, clothing, etc.) and obligations to creditors. Last year, we had less discretionary income than we do today. I can definitely say more is better. More discretionary income translates to more choices and better choices. It means more resources to give, invest or spend on that dream vacation or some other item on your bucket list.
Passive income is the offshoot of your investments. It is the outcome from devoting a percentage of your discretionary income to carefully selected investment vehicles (a retirement account, mutual fund, real estate, etc.) and giving it time to grow. When I review my quarterly investment statement, I am always keenly interested in how much growth came in over the period. Passive income is your money working for you. As with discretionary income, more passive income is better than less.
One common requirement for increasing both your discretionary and passive income is discipline. Cutting off extravagant spending and limiting the use of credit frees up more discretionary income. Investing for the long haul rather than chasing the latest investment fad or get-rich-quick scheme makes room for your passive income to grow. So be disciplined and keep measuring your progress – you will come out ahead.