Many people consider the excess money they have after they pay their bills each month as disposable income, available to spend as they wish. Not so fast, however -- not properly calculating or classifying your necessary expenses and long-term savings goals can seriously disrupt your finances and end up cramping your style. Understanding how to determine your true disposable income will help you lead a more comfortable and secure lifestyle.
Personal Income Statement
A personal income statement is similar to a household budget, but with less detail and/or covering a shorter period of time. It’s a snapshot of your income and expenses, showing what you have left over when you subtract your expenses from your income, or how much debt your financial situation leaves you in. You can create a personal income statement to show your typical monthly situation, or an annual statement that projects how you’ll do at the end of the year when you include gifts, yard sale cash, bonuses, taxes, vacation and other one-time income and expenses.
A general definition of disposable income by academic and government institutions is the amount of money you have after you pay your taxes, with the money you have left after you pay your bills and other expenses called discretionary income. To guide you in reaching long-term personal financial goals, you might want to think of your personal disposable income as the money you have left after you spend your take-home pay on rent, utilities, groceries, phones and other necessary bills. For example, if your after-tax take-home pay is $5,500, and you have $4,000 worth of monthly bills, your disposable income is $1,500. However, this doesn’t take into account your savings goals, such as for a retirement account or a house down payment, which reduce your disposable income.
Your disposable income after you subtract your living expenses, set aside money for an emergency fund and budget for retirement, a house down payment, college tuition for kids and other savings goals, gives you a more realistic disposable income figure if you’re trying to determine what you can spend on dinner, movies, clothing, hair, nails, a gym membership and other lifestyle purchases. And even this can shrink if you have goals such as reducing credit-card or student-loan debt or saving for an annual vacation, new car or a flat-screen TV. Technically, the amount you set aside for savings goals comes from your disposable income, because you don’t have to save that money. If you embrace a mindset that these are necessary expenses, however, you’ll have a better shot at controlling your spending so you can meet your long-term financial goals and still have enough money to enjoy yourself each month.
Create a Budget
The best way to determine your disposable income and not overspend is to create a personal budget. This won’t be a chore using a simple spreadsheet and will help you set goals, track them, make adjustments and set aside money to spend on a few perks you want each month. Write a list of the monthly expenses you think you’ll have each month using last year’s bank and credit card statements. This will help you spot quarterly, semi-annual or yearly expenses such as car insurance, property taxes or credit card annual fees. Average these expenses so you set aside money each month to pay for them. Subtract your monthly living expenses from your take-home pay to find your disposable income. Subtract your monthly savings amounts from this figure to determine what you have left over for fun money each month.
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