Many of us find that our household finances are increasingly stretched. Our disposable income seems to next-to-nothing and tight budgeting is often necessary to help keep us out of the red. Establishing the value of your disposable income is a great first step to budgeting success. We thought we’d put together a guide to disposable income to help anyone looking to take better control of their household finances.
So, what is the definition of disposable income?
Most people in the UK consider their disposable income to be the amount they have left over after they’ve met all their essential financial obligations. For most, this includes taxes, rent or mortgage payments, fuel, utility bills and even food, clothing and household items. However, this is actually ‘discretionary income.’
You can spend your discretionary income however you choose. It’s your eating-out money, your cinema money and your holiday money. It’s the cash you have available for life’s little luxuries. It’s your fun money. However you look at it, this isn’t your disposable income, it’s your discretionary income.
The actual meaning of disposable income is simply the amount we have left over each month after we have paid taxes. Therefore, most of us will have a far higher level of disposable income than we thought.
How does knowing what disposable income is help with budgeting?
Thinking of your discretionary income as your disposable income can actually be preventing you from budgeting successfully. When you start to consider the money you spend on your ‘essentials’ as disposable, as you should, you begin to realise that the cost of these items might actually be more flexible than you thought. Or even that your essentials might not be that essential after all.
Rethinking your views on disposable income can help you to make savings more effectively. The government considers all your income, aside from that owed in taxes, as disposable. This suggests that there is perhaps more choice involved in your ‘essential’ expenditure than you might realise. Consider your food shopping, for example. With a little more planning and a bit more time and effort, most of us would be able to cut down on our food shopping bill, thus increasing our discretionary income. This can mean more scope for saving, or simply more cash for the fun stuff.
What is Gross Disposable Income?
When you’re trying to make a household budget, you need to take into account your gross disposable income. This is your entire household’s disposable income. You can calculate this by adding together the total income of everyone in your household and subtracting all taxes payable. Income includes salary, rental income, bonuses, overtime payments, bonuses and other property income, for example, and taxes can be anything from Income Tax and National Insurance, to Council Tax.
Once you have your true gross disposable income figure, you can start to make a clear household budget.
Some budgeting tips…
Creating a household budget can help you to prioritise your spending and avoid spending more than you earn. When budgeting:
- Make sure you include ALL spending under each category
- Don’t forget sporadic spending like haircuts, school trips and medicines
- Don’t forget to factor in large spends like Christmas and summer holidays
- Use a spreadsheet program to help you see things clearly
- Be honest with yourself
- Use your bank, credit and debit card statements to help you
- Don’t forget to include any debt repayments you make each month
- Remember to factor in any cash withdrawals you make
If, after you do your budget, you realise you are spending more than you are earning, you need to make some changes. If you have a fairly large salary, it’s easy to assume that you shouldn’t need to budget. However, the sad truth is that middle-class earners are among the most likely to fall into debt for this exact reason. Larger salaries often mean larger debts, so it’s time to get real … and this is where our new attitude to disposable income comes in.
Simply by making savings on those costs you have always viewed as essential. For example, do you really need all those TV channels? Could you save on your monthly food bill? Can you swap to cheaper brands when buying pricier items such as washing detergent, shampoo, razors, kitchen roll and dishwasher tablets?
Then there are some measures you can take that could help you boost your monthly discretionary income by a significant amount:
- If you are no longer in your mortgage deal, check if you could get a better deal by remortgaging
- Try to renegotiate your rent
- Swap utility provider
- Cut down on the amount you use your car or get rid of your car completely
- Transfer credit card balances to a 0% interest deal, but remember to clear the debt before the interest-free period ends, or you could face even larger interest charges.
- Clear debts as quickly as you can
There’s no hard and fast rule over how much discretionary income is the right level of discretionary income, just as there is no rule about disposable income levels. Generally speaking, we all want to feel comfortable in our finances, and this means living within our means without feeling that we’re having to go without or make too many sacrifices to keep our heads above the water.
Achieving the right balance isn’t really about the value of your disposable income, or your discretionary income for that matter, it’s about changing your attitudes to ‘essential’ spending and making savings where possible.