How to determine your disposable income?

Disposable income is the total income of an individual from where direct taxes have been successfully deducted. It can also been defined as your “spare money” available after all essential household bills have been paid.

Calculating your disposable income empowers you with knowledge of where your money is going every month. It is critical and it governs most general spending from paying off a debt to saving for a holiday and even planning a trip.

Often when you apply for a loan from a bank or credit services firm one of the important searches they conduct is on your income and expenditure to see if the payments will be managed. For instance, if a loan payment was N100 per month and you had a N500 disposable income, the chances are you will be granted the loan. On the other hand, if the payment was N250 and your income was N200 the credit firm might be reluctant to grant the loan. If they decide to go ahead and consider you, they are probably going to ask for more than your disposable income.

To determine your disposable income start by listing your major weekly, fortnightly and monthly fixed expenses.

A fixed expense is a cost that you generate regularly, for a roughly similar or set figure. Your fixed expenses may include monthly electricity bills, mobile bills (data plans and call cards), cable TV bills, petro bills, grocery shopping, and laundry bills.

If you are monthly earner but have a fortnight car loan payment, you can calculate your fixed expenses based on your pay period so you set aside the right amount of money each pay period, in this case the cost to pay your car loan monthly.

Another way to understand it is; assume that I earn salary on a monthly basis. Considering there are 26 fortnights in a year, I calculate the whole yearly cost of that expense, divide it by 12 months and get my monthly expense amount owed. I then set that amount aside on pay day into my expenses account and do not touch it.

Disposable income is that portion of the income generated by an individual over which he or she has full discretion. Experts at readyratios.com note that “Usually, the indirect taxes, including value add taxes, sales tax, contribution made by the employer towards health insurance or pensions and payroll are not subtracted from the disposable income. Despite minimizing a person’s capacity to spend to a large extent, attributing them to particular families and persons becomes very difficult.”

A major advantage of being able to determine your disposable income and calculating how much you can safely spend is how it re-engages you with your money. You become more conscious that you are not spending over your limit and in fact, well under it.