What is disposable income?

Many of us are finding that our household finances are being increasingly stretched. Our disposable income seems to be shrinking and tight budgeting is often necessary to help keep us out of the red. Establishing the value of your disposable income is a great first step to budgeting success.

With this in mind, we’ve pulled together a guide to help anyone looking to take better control of their household finances.

In this guide: 

• Disposable income meaning 
• What is the average disposable income in the UK per month?
• How much disposable income should I have? 
• What is gross disposable income?
• Household budgeting tips
• Why is disposable income so important?
• How to boost your disposable income 

What is classed as disposable income?

Disposable income is the amount of money we have left over each month after we’ve paid taxes, meaning that most of us may have more disposable income than we thought.

Most people in the UK consider their disposable income to be the amount they have left over after they’ve met all their essential financial obligations. For most, this may include taxes, rent or mortgage payments, fuel, utility bills and even food, clothing, and household items. However, this is actually called discretionary income.

Your disposable income can be spent on necessities, such as food and rent, as well as leisure activities and investments. You can spend your discretionary income however you choose. It could be your eating-out money, your cinema money or your holiday money. It’s the cash you have available for life’s little luxuries!

What is the average disposable income in the UK per month? 

The average household disposable income in the UK per month is around £2,156 (before things such as housing costs have been deducted).

We conducted a disposable income survey to see whether Brits are satisfied with figures like this, uncovering some interesting insights. We found that less than half (47%) of Brits are satisfied with their disposable income, with a further 67% revealing that the cost-of-living crisis has negatively impacted their finances.

How much disposable income should I have?

While we’ve outlined the average disposable income in the UK, this figure can vary according to your unique situation.

If you’re wondering how to work out your disposable income, the government considers all your income, aside from that owed in taxes, as disposable. So, the formula for disposable income is simple: it’s your personal income minus your current taxes.

This suggests that there is perhaps more flexibility involved in your ‘essential’ expenditure than you might realise. Consider your food shopping, for example. With a little more planning, most of us would be able to cut down on our food shopping bill, thus increasing our discretionary income. This can mean more scope for saving, or simply more cash for the fun stuff.

If you’re looking to break down your spending and save more, our guide on how to build a budget will come in handy. In it, you’ll find information on setting up your first budget, as well as insights as to why budgeting is so important!

Or why not check out our guide on the 50/30/20 rule? This offers a simple, easy-to-follow budgeting framework that helps to split up your budget for needs, wants and savings goals.

What is gross disposable income?

When you’re trying to make a household budget, you need to consider your gross disposable income. This is your entire household’s disposable income. You can calculate this by adding together the total income of everyone in your household and subtracting all taxes payable.

Income includes salary, rental income, bonuses, overtime payments, and other property income, for example, and taxes can include anything from Income Tax and National Insurance to Council Tax.

Once you have your true gross disposable income figure, you can start to make a clear household budget.

Household budgeting tips…

Creating a household budget can potentially help you avoid spending more than you earn – and subsequently falling into financial trouble. So, here are some tips to follow when setting up your household budget:

• Make sure you include ALL spending under each category
• Don’t forget sporadic spending like haircuts, school trips and medicines
• Factor in large spends like Christmas and summer holidays
• Create a spreadsheet to help you see the value of your expenses clearly
• Use your bank, credit and debit card statements to assess your expenses and spending habits
• Don’t forget to include any debt repayments you make each month
• Remember to factor in any regular cash withdrawals you might make

If you realise that you’re spending more than you earn, you’ll often need to make some changes. Middle-class earners are among the most likely to fall into debt for this exact reason. Larger salaries can often lead to larger debts, and this is where our new attitude to disposable income comes in.

For example, could you save on your monthly food bill? Or can you swap to cheaper brands when buying pricier items such as washing detergent, shampoo, and kitchen roll?

Keen to get started with your own budget? Our budgeting made simple guide includes a handy checklist and ready made spreadsheet you can use!

Why is disposable income so important?

Disposable income is important as it directly impacts your ability to manage your standard of living and make choices about saving, spending, and investing.

Having more disposable income can help allow for better financial security, giving you the opportunity to set savings goals (for education or retirement) and even build an emergency fund.

How to have more disposable income

Here are some measures you can take that could help you boost your monthly discretionary income by a significant amount:

• If you are no longer in your mortgage deal, check if you could get a better deal by remortgaging
• Try to renegotiate your rent
• Switch utility provider
• Make small changes, such as cutting down on how often you use your car to help reduce fuel expenses
• Transfer credit card balances to a 0% interest deal to reduce interest fees. But remember to clear the debt before the interest-free period ends, or you could face even larger interest charges
• Make a plan to clear debts as quickly as you can

There’s no hard and fast rule for how much discretionary income is the right amount, just as there is no rule for the amount of disposable income you should have. Generally speaking, we all want to feel comfortable in our finances, and this means living within our means without feeling that we’re having to go without, or make too many sacrifices to keep our heads above the water.

Achieving the right balance isn’t really about the value of your disposable income, or your discretionary income for that matter, it’s often about changing your attitude to ‘essential’ spending and making savings where possible.

Hopefully you’ve found our guide on the meaning of disposable income handy, and you’re now feeling ready to work towards managing and boosting yours.

And if you’re looking for additional insights, just head over to the Moneyboat blog. There you can dive into guides on managing your personal cash flow and financial wellbeing tips and support.