Tuesday, April 28, 2009

Disposable Income - What the...????

We all have money. Whether you're on the dole/benefits or earning the big bucks, we all have some amount of money to live with. I can vouch for being on one end of this equation, I lived on youth/education benefits for quite some time. Right now, I am heading towards making more money, but I'm still along way away from the big bucks. 

You might find it surprising, but how much you make is not really important to achieving financial independence (ie. living comfortably and being able to buy KFC when you want). The secret is understanding what amount you have "spare", what I like to call disposable income.

Disposable income is a funny thing. For some people, disposable income is what they spend on alcohol every week, or buy smokes with for the week, for others their disposable income pays for holidays, while some people find a happy balance between saving some of their cash and spending the rest on "benefits".

So, how much disposable income do you have? In a future instalment I will explain further how you can calculate this magical number, but in the purest sense, disposable income the amount of cash you have left after paying for the "essentials". After paying bills, mortgage repayments, buying Kentucky Fried and paying for fuel, we all have a buffer amount that is left. Disposable income is the amount that YOU ARE HAPPY WITH and NEED to spend on yourself, whether that's paying for your WOW account, or buying smokes or drugs, or for drinkies down the pub on Friday. (editor note: WOW = World of Warcraft computer game). For some people this amount is much much larger, especially if they have expensive tastes. 

Throughout my life, my disposable income has changed. It was at one stage (back in my early 20s) no more than $40/week, but now I am more comfortable to be left with $200 to spend on whatever I wish. Why is this amount important to work out? I'll let you in on a secret. Very quietly now...: You should invest the rest into cash flow positive or capital producing asset classes. 

Working out your disposable income is, in a way, a way to identify how much cash you have to do something constructive with. For some of you, this amount will be $0, and I would suggest you are leading a very happy and fulfilled life (for now). For some of you, you will be surprised on how little you can get by and for others, you will notice that you have a whole heap of cash left that is "disappearing" week to week. 

In my next post, I will attempt to explain a bit more in depth how you can work out your disposable income by doing the unthinkable - creating a budget overview! SHOCK HORROR! Oh, my EYES!!!!

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