Disposable Income vs. Discretionary Income

During the winter, many young adults get jobs to help fund their holiday shopping. Getting a part-time job can be a great, not only for buying gifts, but also for experiencing what it is like to earn a living. One of the first things people learn from their first jobs is that not all of their hourly wages finds its way into their paychecks. Paychecks are reduced by taxes and other required expenses, which are deducted before you ever get your pay. What is left over is known as disposable income. This is money that you are free to spend as needed for bills, paying off debts, or buying gifts. Young workers must anticipate that their disposable income will be significantly less than what they earn.

Disposable income: Disposable income is equal to your earned salary (or gross pay) minus federal and state taxes, Social Security withholdings, and Medicare withholdings. To find out what percentage of your gross pay you will predictably keep each pay period, look at your first paycheck. It will list all the standard withholdings that will occur. Follow this formula: Divide the sum of all the withholdings by your gross pay. Multiply the result by 100, subtract that result from 100.

100 – [(withholdings ÷ gross pay) x 100]

This is the percentage of your salary that you will receive as disposable income. By calculating this figure ahead of time, you will know how much income to expect each month.

Discretionary income: Discretionary income is what is left over from your disposable income after all your bills are paid. Since most bills such as car insurance premiums or rent tend to cost the same amount each month, you can calculate your expected discretionary income so you know what to expect. To calculate discretionary income, subtract all your regular monthly bills and expenses from your monthly disposable income.

Discretionary income = disposable income – monthly expenses

You should base your shopping budget on your discretionary income, not your disposable income. This way you can be aware of exactly how much money you have free and avoid overspending.

READERS, what do you think?

Did you know about all the tax withholdings from your paycheck? What do you think they go to pay?

Paying for College with KEES

Did you know that saving as little as $500 improves your chances of starting and completing a college degree? Even small amounts of money can make high education a lot more obtainable. Students in Kentucky have an extra advantage when saving for school. Any student attending (or recently graduated from) a participating Kentucky high school can earn scholarship funding through the Kentucky Educational Excellence Scholarship (KEES). As long as you meet the minimum requirements, the Kentucky Higher Education Assistance Authority (the organization that runs KEES) will contribute money to a KEES scholarship account on your behalf. You can even continue to earn more KEES money during your undergraduate years in college, as long as you meet the minimum GPA. 

Beginning your freshman year of high school, your yearly GPA is used to determine the amount of KEES money place into a scholarship account on your behalf. The minimum GPA is 2.5, and you earn more if your GPA is higher. So if in 9^th grade you have a 2.5 GPA, you will have $125 added to your KEES account. If in 10^th grade you have a 3.5, you will have $375 added to that first $125. You can continue to earn money in this fashion until you graduate. Whatever amount that is in your KEES account is now a scholarship award for EACH year of college. And don’t’ worry if your grades drop below the minimum one year, you can start earning KEES money again once you bring your GPA back up (This goes for college, too.). 

Students can also add to this scholarship through bonuses. To begin earning more scholarship funding, students can achieve at least a 1500 cumulative ACT score (or a 710 math/verbal SAT score). The higher the score, the more funding you receive. Free or reduce lunch students can even earn more scholarship money by taking AP or IB exams. A score of 3 on the AP exam will net another $200. So, if you have a 3.6 GPA for all four years of high school (+$1,600), a 21 ACT score (+$250), and an AP exam score of 3 (+$200), then you now have a yearly scholarship of $2050!

If college is not a part of your plan, you can still use your KEES money. KEES awards may be used to fund technical college education and even some vocational training.

To check your KEES account, go to https://www.kheaa.com/apps/registration/register-new. Register as a student and sign in. You may find that higher education is much closer than you think. 

References:

Kentucky Higher Education Assistance Authority. (2013). Kentucky Educational Excellence Scholarship (KEES). Retrieved from https://www.kheaa.com/website/kheaa/kees?main=1.

Patel, D. (2009). Education beyond high school is necessary: The role that parents, other adults, and friends play in young people’s education and training. HSFPP Update #224. Retrieved from http://www2.ca.uky.edu/hes/fcs/hsfp/updates/2009/update0224.htm.

Types of Life Insurance

There are different types of life insurance policies. The type of policy you have can effect how much you pay in premiums over time, and if you get any additional benefits. All companies handle their policy's differently, but here is a general description of the two main types of policies:
 

Term Life Insurance- This is the simplest type of policy. The coverage lasts for a set period, so long as you pay the premiums. If a policyholder dies within the time period set by the policy, then the insurance company will have to pay the benefactors the agreed upon coverage amount. Policyholders have the option to renew their policy at the end of each term, usually annually.

 Younger adults can get generous term life coverage for cheap premiums because they are less likely to die suddenly and need the policy amount paid out. Term life insurance premiums get more expensive as people get older as it becomes increasingly more likely that the company will have to pay out the coverage.

Whole-Life Insurance- This is a permanent life insurance policy that provides coverage for death but also an investment fund. This type of policy will pay a clearly stated, fixed amount upon the event of the policyholder’s death. The premiums paid usually stay the same throughout the length of the policy. The part of premium is used by the insurance company to make investments, so the premiums build additional cash value. Policyholders can borrow against the cash value accumulated through the investments.

Reference:

CNN Money. Types of life insurance. Money 101. Retrieved from

         http://money.cnn.com/magazines/moneymag/money101/lesson20/index2.htm

Video Post: How Does Life Insurance Work?

This video is from the financial information website Investopedia. It quickly describes why someone would purchase life insurance and how a company could lose money if someone does not live as long as expected, and how to counteract that. Follow the link to watch the video.
 http://www.investopedia.com/video/play/life-insurance/

The Reason for Life Insurance

Have you seen commercials for life insurance before? Maybe they run in the middle of the day during your favorite game show, and usually feature happy older adults who want to cover their final expenses? Commercials like these probably have led you to believe that life insurance is meant for older people, or that the main purpose of it is to cover funeral costs. However, this is not the case. While these advertisements target retirees and grandparents, young parents are actually in the greatest need of life insurance.

Why is this so? Well, life insurance is not meant to cover just the cost of a funeral or a few unsettled debts. Life insurance is meant to provide financial support to a person’s dependents should he or she pass away. Older, retired adults usually have assets from years of working and mortgage paid off if they owned one as well as dependents have grown up and therefore usually do not need a lot of insurance coverage. On the other hand, young and middle-aged adults often work to support a family, and life insurance plans are more helpful in unlucky circumstances.

A dependent is anyone who relies on another’s income in order to survive, and they are the real reason most people need life insurance. Small children, for example, cannot get a job to support themselves if something unfortunate were to happen to their parents, much less pay off any debts that were left behind. If widowed, unemployed spouses may face difficulties paying for the expenses that pile up. Employed spouses may fair better without an insurance pay out, so long as the lost income was not needed to care for children or pay off debts. After children grow up or a spouse becomes employed, people can often save money and cut their insurance coverage because fewer people are relying on their income.

The amount of insurance coverage a person needs can usually be determined by the number of dependents and the amount of debt that he or she has. There are also many different types of life insurance plans, and we will discuss a few in a later post. Life insurance is a personal decision, but keep in mind the real reason why insurance is important so you can make the right choices in the future.

READERS, what do you think?

Why do you think some people with dependents do not have life insurance policies?

Do you think some people have more life insurance coverage than they need? How so?