Should Income Be “Disposable?”

money bills

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)

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4 Responses to Should Income Be “Disposable?”

  1. Crikey it almost felt as if I was reading something that I would write or talk about. I agree with you on all levels about disposable income. It’s ok to have some fun but all of our money is in a designated category for the same reason so we don’t overspend. We know people that run out and blow the lot of a bonus or lump sum payment but seem to forget about the credit card debt they have mounting up. Personally, I’m not into debt nor do I wish to hang on to it. There’s always time for fun, and if we manager our money right the balance will be there! Willy Nilly, haha.. that’s what I often say.

  2. jay says:

    Ah, the key is to TRACK your money! That’s where I think many of us get derailed. We may even go so far as to budget everything down to the amount we give ourselves “permission” to spend on a fun category. Well, unless you know how much you’re spending, it’s all moot. Back to the old envelope system!

  3. lakeside says:

    I disagree — for some people. For those of us who are on top of our financial game, there is no reason to track every penny. “Hey, I’ve paid all my bills so whatever’s left must be fair game.” is EXACTLY how we live — but for us, our “bills” includes saving $80,000+ toward retirement every year.

    Once we pay all our bills, including balance transfers into accounts for taxable investing as well as all the money that gets take out of our paycheck pre-tax AND short term savings for things like replacing cars, home repairs, and any other infrequent yet expensive event, what is left is EXACTLY disposable income, or whatever you want to call it.

    Could we squeeze a few thousand more into retirement accounts by giving every single penny a purpose? Maybe — but we’re already on track to retire at 50-55, and we have no desire to live like paupers now so that we can live it up in retirement. There’s always the unfortunate chance that we wouldn’t make it to retirement so we don’t want to sacrifice everything right now. We’d rather go to dinner and a movie every weekend than have another three grand in a retirement account.

    Basically my point is that “pay all your bills and contribute to your savings and retirement and then spend what is left on fun things and experiences that you enjoy” actually IS a valid budgeting style. Just because it’s not the one you prefer doesn’t make it a bad idea — it’s just not one you use.

  4. Gailete says:

    Lakeside–Good for you, although tough for me to hear that someone is saving 3 times what we bring in for an entire year. Not jealous though!

    I have never thought of money as disposable as in something to waste. I think I have kind of hit the wall about this these past couple of weeks. I earned and received a $350 gift card to Amazon for some on line ‘work’. I’ve only spent maybe half so far since even though I have had things on my wish list that ranged in the $100 area, I’m still shifting through options wanting to make the most of this truly ‘disposable’ gift. When you first get this much money it is easy to see all sorts of possibilities, but when you live on the limited income like we do, even if it is fun stuff to buy, you really do want to make the best of it all If I had gone with my first instincts, I probably would have wasted it. I sure don’t waste the money we earn so why waste something like this gift?

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