One of the financial phrases that always irks me is “disposable income.” Disposable income is money that has no designated purpose and thus can be blown on anything you want. It’s money that is not “needed” to meet your obligations and thus can be spent on frivolous stuff. The word disposable brings to mind images of tossing money out of car windows and huge shopping sprees. Things like paper plates and single-use razors are disposable, designed to be used and then tossed away without a care. Money is not like that. Or at least it shouldn’t be.
Economists love to measure and speculate about disposable income. In an economy that is mostly supported by consumer spending, disposable income is often the difference between economic health and failure. The government hopes that people have plenty of income to dispose of. If they do, then every dime that they blow on “stuff” gets pumped into the economy. Woo hoo! If they don’t dispose of enough money, the economy tumbles.
But as someone who seeks to carefully manage her money, thinking of any part of my income as “disposable” makes me cringe. Smart money management dictates that you know where all of your money is going. Just blowing chunks of change willy-nilly on stuff isn’t smart or responsible. Throwing money away without a care is never a good idea. That’s not to say that you shouldn’t have fun with your money. After your basic necessities are taken care of and you future provided for, by all means have some fun. Otherwise life is a snore. But even fun money is not disposable in the truest sense of the word.
A better way to look at money is through the lens of budget categories. Every dollar that you bring in is assigned to a specific purpose. You assign money to categories like rent, utilities, clothing, food, debt payments, savings/investments, and medical care. After you’ve taken care of your necessities, what’s left? Economists like to call it disposable income. I prefer to create more budget categories. I have categories for travel, hobby expenses, charitable giving, dining out, home decor, movies, “fun” clothing, and other things that I want to do or buy that are not strictly necessities. Instead of viewing any extra money as a lump of disposable cash that I don’t need to track, I view every dollar as having a mission. Even if that mission is fun and frivolity, it’s still a mission.
Viewing my money this way ensures that I never “dispose” of too much money. I don’t go around spending and thinking, “Hey, I’ve paid all my bills so whatever’s left must be fair game.” I know that, for example, if I’m at the bookstore, I have thirty dollars to spend that month on books. I track my spending and I know when I’ve hit my limit. I don’t get caught up in thinking about how much I can spend without jeopardizing other things. I already know the answer when I walk in the store. As a result, I don’t end up kicking myself later in the month when I really want to go out to dinner but discover that the money isn’t there because I blew it on other stuff. And I don’t end up hating myself months down the road when I want to go on vacation but can’t because I “disposed” of my extra cash at the mall.
When every dollar has an assigned purpose, you don’t overspend, you don’t neglect important goals, and you don’t end up wondering where it all went. You know exactly where it went and that it went there with intention. It wasn’t simply thrown away without thought like yesterday’s trash. Thinking of money as disposable makes it all too easy to fritter it away. Thinking of money as having a purpose makes it easier to keep it.
(Photo courtesy of quinn.anya)