Most of us have heard the term “disposable income,” but what exactly does it mean? Many people mistakenly assume it’s the same thing as “extra income”; however, this is not the case. Disposable income is the money that is left over after taxes and essential living expenses such as groceries and rent have been deducted from total income.
What Does Disposable Income Mean?
It means the net income from all sources that remain after taxes, deductions and necessary expenses have been taken out. In essence, it is your money that is left over to spend or save at your own discretion. Disposable income is calculated using the net figures of a person’s salary, freelance earnings, investment returns, tips and other possible income sources.
How Is Disposable Income Used?
Disposable income is an important aspect of budgeting and money management. Money that is used for basic necessities, savings, debt repayment, investments and leisure activities are all considered part of disposable income. This money can be used for whatever it is that will improve your life and help make up for the expenses required to make ends meet. When you use your disposable income responsibly, it can have a positive impact on your financial future.
Budgeting With Disposable Income
Managing disposable income is an important part of budgeting and planning. It’s important to allocate a portion of your net income to short term savings and long-term investments in order to reach financial goals. These can range from saving up for a downpayment on a house, paying off debt, contributing to retirement, or saving up for a vacation.
When budgeting, it’s a good idea to create a balance between short and long-term goals. A combination of saving for both short-term and longer-term needs is key to achieving success in financial planning. By understanding your disposable income and using it in a smart and sensible manner, you will be well on your way toward achieving financial freedom.