How to calculate your disposable income

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Owning a home brings with it a number of responsibilities and outgoings that you may never have considered before, and as such it is important to know exactly what is going in and out every month.

While most people will be aware of their monthly or yearly salary and also have a firm idea about their financial commitments, several things can affect disposable income, and so having a firm grasp on exactly what that entails is essential for every homeowner.

Income

Although a person may earn a specific annual salary, the amount they come out with each month can vary greatly depending on a number of criteria. Salary should always be worked out as a net value, rather than gross, which means excluding any contributions the individual has to make before the payment is received.

This can include National Insurance and employee tax, but also variables such as student loan contributions and private pension contributions, which can each differ significantly depending on the person’s tax band and their long-term financial arrangements.

On top of this, any working tax credits, child benefits, disability allowance and other government contributions need to be factored in. Once this has been calculated for all adults living in the house, the overall monthly income can be determined.

Outgoings

Understandably, the list of monthly outgoings is far greater than income streams, even though the amounts are likely to be smaller.

First start with any direct debits and commitments that you are legally or contractually obligated to make, the most significant of which is likely to be your mortgage.

Depending on the type of mortgage you have, your payments can vary slightly over time, but generally it will be around the same amount each month. In addition to this, other housing commitments such as council tax need to be included – this will again vary depending on the size of your property and the area you live in, although if you live alone or are a single adult you will be entitled to a discount.

Utilities will form another significant part of your outgoings, and while this was once considered to be simply gas, water and electricity, there is a general consensus that broadband is now deemed essential to daily living, so include this, as well as any landline, TV and mobile phone commitments.

If you have any loans, credit cards or store cards that require a monthly payment, be sure to add these to the list, and also factor in any insurance commitments such as home, contents, life, medical and pet cover.

If you do not pay your motor premium annually, then car insurance needs to be factored in, as well as other transport costs such as car finance, road tax, bus and train passes, car parking and fuel – again, these can vary each month but if it is a regular expense and the amount does not differ too greatly then it is possible to estimate the figure quite closely.

Families will have one more major expense in the form of their children, and while things such as clothing, food and entertainment will be used up by the disposable income, any commitments such as nursery and childminding fees, school tuition costs, dinner money and bus fare should be factored in.

Disposable income

When the two lists are complete, deduct the outgoings from the household income and you will be left with the family’s disposable income.

Many people like to wait until direct debits and other commitments are made before then deciding what to do with disposable income – for some, this means contributing to a savings account or investing, and while these could be considered monthly outgoings, the flexible nature of these contributions means it is best to factor them into disposable income.

Although some people may like to include other regular expenditure in their monthly outgoings, such as the weekly food shop, other things such as holidays, recreation, clothing, drink, hobbies, sports, beauty treatments and gadgets should all be considered luxuries and therefore included in the disposable income.