Most individuals misinterpret disposable income as the money that they can use in whatever way they want to. However, it does not mean that. Disposable income is the amount that one has after meeting the bills and taxes. You may want to spend this extra money on what you want. It is the general trap that one falls into. However, in the beginning, you must pay off the necessary charges. It may include the rent, electricity bills, and mortgages.
Yes, one must have fun in life. However, it should be well-regulated. You can do more than just book tickets to your favourite destination. For example, you can fund a portion of it for retirement planning. Making it a habit may secure your life post-50. You would not have to depend on someone for financial assistance then. Similarly, you can utilise this disposable income for other purposes also. If you often struggle to understand the best usage of disposable income, read ahead.
What does disposable income imply?
Disposable income is the amount that an individual has after paying important taxes and bills. It may include essential and non-essential expenses. This means individuals can also use the amount to book a holiday or meet critical bills like rent. The income may differ according to the earnings, liabilities, taxes, and lifestyle.
Disposable Income = Personal Income- Taxes- Mandatory Deductions and Expenses
This type of income is critical for economic growth. It reveals how much an individual spends, earns, saves, and invests. It drives the demand for the good and contributes to economic well-being.
How does disposable income differ from discretionary income?
It is common to consider disposable and discretionary income as one and the same thing. However, these are two different terms. Discretionary income is the term that defines the money left after paying taxes and essential living expenses. It is the money that you are left with to spend on other non-essential expenses or save.
Alternatively, disposable income helps calculate the amount that an employer can deduct. This means that disposable income is the amount that you receive after deductions. You can use this amount both for essential and non-essential things.
Understanding this prime difference between the two terms helps you budget better. For example- you can check your disposable income to extend your discretionary income. Identify where you can cut costs to increase the overall savings. It may help you achieve goals like saving for a deposit on long-term personal loans like home renovation. A deposit reduces the total amount you must pay on the loan. Moreover, it helps you qualify for bad credit at better interest rates. You can spread the payments in affordable instalments for a longer time. It may exceed the loan completion term and interest. However, it helps you achieve the goal without trouble.
5 Ways to use your disposable income wisely
Now you know how important your disposable income is. Therefore, using it wisely is critical for financial growth. Here are some ways you can use your disposable income:
1) Save towards mortgage deposit
If you want to purchase a home within 3 years, you must start saving for the deposit. Generally, you must provide 10% of the house’s value as the deposit. You can calculate it using the free calculator. For example- if the property costs £2,00,000, you must save £20000 for the mortgage deposit. It is the basic or the minimum that you must pay to qualify. You can also make a deposit if you can afford to. It only reduces the total amount you must pay to claim the home, which is yours. It also reduces your monthly instalments.
2) Create an emergency fund
An emergency fund is a financial savings account that helps you counter critical life phrases like unemployment or business loss. You must have at least 6 months of cash backup to support basic living in poverty-like conditions. You don’t need to begin big if you don’t want to. Instead, just start with £100/month. Yes, you can save less than that, too. It is just about prioritising critical expenses and unexpected financial times.
Saving £100/month for 6 months would give you a cash backup of £600 plus interest rates. You cannot withdraw it anytime. However, you can do so only when you face extreme financial downfall. There is no limit to saving any amount here. You can even save £3000/month if your budget allows.
3) Creating a retirement safety net
Just like emergency funds, you must plan your retirement, too. Generally, you must have 10x of the current income for a successful retirement. However, most individuals fail to plan one and struggle later. Thus, analyse your disposable income. Split your needs and wants and prefer the needs first. It will help you save money for a healthier and happier life.
4) Counter and pay off some debts
You must analyse and settle some debts to avoid carrying them up to retirement. It may mean paying unnecessary interest and penalties. Check the debts that you have been lagging on. Consult your creditor for the debt management plan or new repayment schedule. It should align with your existing financial structure.
Before that, analyse the debts you can repay with a portion of your disposable income. Generally, you must have 30% of your primary income as disposable income. Using even 5% of it towards debt payments may help. It will help you ensure a debt-free retirement or help you achieve other goals. If you need further help with clearing debt, unsecured loans in the UK may help. You can use it to pay a single heavy debt or consolidate multiple at better interest rates. The latter may help you improve your credit score and get debt-free quickly. However, check whether you may benefit from consolidating. Pay the dues in fixed instalments to boost the credit rating.
5. Meet VISA requirements
If moving to a new country for a job or study within the year, then this income may help. You can use a portion of it to pay for costly visa proceedings. It will help you avoid the last-minute panic situation. You cannot take the risk of rejection or delaying the process.
Bottom line
These are some of the best ways to use your disposable income. Identify and calculate one by deduction essential expenses and taxes from the income. The number you get is your disposable income. Instead of using it all on wants, save some towards needs, too. Spend it on aspects like- emergency funds, retirement savings, or mortgage deposit savings.
Source: weeroyal.com
