What is disposable income?

The amount that is left from your salary after fulfilling your income tax responsibilities is known as disposable income. A person may save, spend or invest this income. It is also known as the disposable personal income.

How to calculate disposable income?

Disposable income = Gross Income – Income Tax To Be Paid

For instance, if you have a salary of Rs 32,000 and pay an income tax of Rs 2,000 then the disposable income is Rs 30,000.

Examples of disposable income

• Salary
• Self-employment
• Pension
• Social benefits
• Investments

Benefits of disposable income

• It plays an important role in times of crisis, such as job loss or medical emergencies.
• Using disposable income, a person can strike a balance between his needs and wants. While a certain portion of the disposable income can be allocated to secure one’s future, a part of it can be used to splurge on luxury or aspirational demands.
• Disposable income helps achieve your financial objectives. This may be anything from paying the down payment for your dream house, going on a foreign holiday, sending your children for foreign education or retiring early.

Ways to effectively use disposable income

• Set financial goals: Make a note of your goals. This may include buying a property, planning your retirement or pursuing foreign education for yourself or your children.
• Budget: Set a budget that will help you make a note of your priorities. Your budget should divide the disposable income into compulsory expenses, the money that you intend to save and the money that you want to spend on aspirational needs. This budget will give you a clear indication of how to plan your finances.
• Always allocate an emergency fund. This will take care of sudden financial woes, such as medical emergencies or job loss.
• If you receive an unexpected bonus, use this money to amplify your savings or repay loans rather than spend on unnecessary things.

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