After you have deducted your taxes, private pension payments, insurance covers, electricity, and phone bills, the money you are left with as part of your monthly paycheck is what is termed as disposable income. The term, in most cases, is viewed as money you can spend however you wish or irresponsibly, which is not necessarily the case. As you seek to pursue financial freedom, you need to be very intentional on how you spend your disposable income. Here are five ways that will help you do that.
Know How to Calculate Your Disposable Income
Accountability is the first step to any financial success. This means that you need to keenly follow up on how you allocate your money every month and finally see how much is left at your disposal. Several guides can help you do your math without necessarily having to use a large, complicated spreadsheet. A good example is
Differentiate Between a Basic Need and a Luxury
The next step, after you have calculated your income to determine your disposable income, you need to be clear on what a basic need is and what is not necessary. This way, you will know what to prioritize on and what could wait if the money is not enough.
Have a Luxury Spending Plan
With the luxury spending in the UK expected to grow highest in 2019, it is clear that many people want a taste of the lifestyle. The good news is that no matter how much or how little you may be earning, with an excellent luxury spending plan, you too can enjoy something great every once in a while. You do not need to spend all your disposable cash, trying to match the standards of your rich neighbor. However, if you allocate about 10% of your disposable income every month for a luxuries spending, by the end of the year, you could be able to go for that holiday getaway you’ve always dreamt about.
The Percentage Saving Plan
The best way to manage your finances is by working with percentages. It is evident that taxes will affect your disposable income, and you are likely not going to have the same amount of disposable income every month. Working with percentages keeps your spending flexible and stable. You may not always have 5000 Euros every month to save, but you can still save 10% of whichever disposable amount of money you are left with.
Another way that could help you manage your disposable income is by using ISA allowances. This is the amount of money you could save tax-free every year. However, there is a limit to the amount of money you could deposit in an ISA account, and you need to make sure that you have spent it before the next tax year, otherwise, you will lose it. 2019 ISA allowance is at £20,000 with the junior and lifetime ISA allowances being at £4,368 and £4,000 respectively.