What is Disposable Income?

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Did you know that most of us are using a completely incorrect definition of disposable income? We’re here to set the record straight.

Many of us find that our household finances are increasingly stretched. Our disposable income seems 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’ve put together a guide to help anyone looking to take better control of their household finances.

What is classed as disposable 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. The average household disposable income in the UK per month is around £2156 (before things such as housing costs have been deducted).

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 called ‘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!

How much disposable income should I have?

If you’re wondering how to work out your disposable income, the government considers all your income, aside from that owed in taxes, as disposable. So, the formula for disposable income is simple: it’s your personal income minus your current taxes.

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 consider 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, 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 avoid spending more than you earn, and subsequently falling into financial trouble. So, here are some tips to follow when setting up your budget:

  • 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

We’ve got a detailed guide on how to build a budget which might be helpful for you too. In it, you’ll find information on setting up your first budget, as well as insights as to why budgeting is so important!

If, after you do your budget, you realise you are spending more than you are earning, you need to make some changes. Middle-class earners are among the most likely to fall into debt for this exact reason. Larger salaries often mean larger debts and this is where our new attitude to disposable income comes in. For example, could you save on your monthly food bill? Or can you swap to cheaper brands when buying pricier items such as washing detergent, shampoo, kitchen roll and dishwasher tablets?

How to have more disposable income

Equally, here 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.

  • Make a plan to 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.

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