So much in our world now is disposable, everyday items such as packaging, clothing and computers. Even appliances have a much shorter lifespan than in our parents and grandparents’ day. Everything around us seems to based on the principle of ‘use and dispose’ of as quickly as possible. So why do we use that term for our money as well?
What is disposable income and where did the term come from?
I asked Mr Google for a definition of disposable income and here’s a couple he came up with.
Oxford References said this:
Personal income actually available for spending. This is total or gross income less direct tax and social security contributions.
Investopedia put it like this:
The amount of money that an individual or household has to spend or save after income taxes have been deducted.
If that is what it is, where did this term come from?
I could have spent hours going down this rabbit hole! From my brief literary research, it seems it’s a term coined by economists and used to measure all manner of things, even the health of the economy. We shouldn’t be surprised by this.
A lot of terms we use to talk about money come from the rational thinking economists and accountants. They forget that us mere mortals are actually very emotional, and we attach all sorts of meaning to language, that doesn’t always fit nicely with their definition.
Okay, I’m well and truly in the rabbit hole now, so let’s take a closer look at this.
Our income is disposable after we pay our taxes, but what our living costs? All those lovely things on level one of Maslow’s Hierarchy of Needs, e.g. food, water, sufficient rest, clothing and shelter, health?
Once we have paid those, according to my friends at Investopedia, we are left with discretionary income, which they defined as:
Discretionary income is the amount of an individual’s income that is left for spending, investing, or saving after paying taxes and paying for personal necessities, such as food, shelter, and clothing. Discretionary income includes money spent on luxury items, vacations, and nonessential goods and services.
So where did the term discretionary income come from?
You can look to our friendly economists again, but you also need to look at our banking system. They look at both disposable and discretionary income to decide the type of risk we represent when applying for a loan!
To be honest with you, I’m not a fan of either of those terms.
Certainly not disposable income. It implies you can dispose of your income just as you do an ice cream wrapper. Is it any wonder that money just slips through our fingers with no thought about where it is going when you think of it as disposable?
Discretionary is kinda OK. It does imply that we have choices, which I like, but typically we don’t think about our money as being disposable or discretionary. I know I don’t and I’m the expert!
It’s time to reframe how we think about our income. Forget the economists and banking jargon, think of your income like this.
Your income is part of your wealth creation plan. It isn’t to be treated lightly, or to be disposed of without a second thought.
The time, effort and energy you put into generating your income, is really creating an asset. [my apologises to my accountant friends, that statement doesn’t fit nicely into our training of what goes into a P&L and what goes into a Balance Sheet].
Let me say it again. When you are generating income, you are creating an asset.
We are taught to use income to create or buy an asset. I want you to cut out the middleman and go straight to “my income is an asset.”
Then think about how you choose to use that asset. You can choose to use that asset to acquire a whole heap of disposable stuff that gives you a short burst of joy and then fades. Or you can choose in invest your asset into things and experiences that really matter to you, that give you joy and a long-term benefit.
Of course, you are going to use some of your asset to pay our every day necessities like rent/mortgage, food, water, clothing, power bill, etc. Of course, you are going to use some of your asset for coffee, wine, clothes, gadgets and holidays. And that is perfectly fine.
What I want you to do, is switch your thought process from this income is disposable to thinking, “If I spend this money on this item, will it increase or decrease my asset?” Followed by “Am I okay with that?” If the answer is yes, go for it, if the answer is no, put your wallet and credit card away.
I would love to have a chat with you about how you define your income and how these terms impact your thinking and behaviour with your money.
Feel free to leave a comment, drop me a line and let’s talk.