With the price of living steadily rising and wages failing to keep up with the trend everyone is needing to tighten their belts a little bit more. Everyday essentials from food to travel have slowly increased in price and the uncertainty surrounding Brexit isn’t helping matters either.
All this adds up to one certainty: we have less to spend. Our disposable income is being squeezed to the point where we were actually financially better off twenty years ago than we are now. Disposable income in the UK by definition has become something of a luxury that we cannot afford anymore.
So what is disposable income? How can we work it out? How much should we have? Does an IVA debt solution really require you to sacrifice all of your disposable income? The following post aims to answer all these questions and more and give you a guiding hand as to how you can can make your finances work better for you.
So, what is disposable income? Technically, the definition of disposable income in the UK is your income after personal taxes have been deducted. However, the general population have come to regard their discretionary income as their disposable income.
Discretionary income is when you take your monthly income after taxes and then subtract all your essential bills from it. The amount that is left to spend on whatever you like, such as leisure activities, is your discretionary income but is generally known as your disposable income.
Your disposable income is also what is taken into consideration when applying for an IVA or help with bankruptcy. You could be made to pay some or all of your disposable income to your creditors if the Official Receiver deems that you can afford to pay it.
Gross Disposable Household Income, or GDHI for short, is the term given to the amount of disposable income that a household as a whole has at the end of the month. The way you calculate this is by adding up your various incomes. This can include wages or self employed earnings, any pensionable income, any property income and miscellaneous forms of income such as insurance claims, grants or gifts from abroad.
Each person living in your household that is earning an income must do this. You then deduct all the drains on that income such as tax, national insurance, pensionable contributions, and any bills you pay. The figure that is left is your personal disposable income. Finally, combine it with the personal disposable income figures that everyone else in your household has reached and you will have your Gross Disposable Household Income figure. Things such as debt consolidation can help to increase the amount of disposable income you have by making it easier to pay off existing debts.
The current average disposable income in the UK backs up the trend of rising prices and diminishing disposable income. Recent research suggests that the UK on average has less money to spend than it did just 12 months ago.
It shows that UK households now have £100 a month less thanks to having to spend more on household bills, housing costs and food. Use the following link to see the full facts and figures of this disturbing trend:
Average Disposable IncomeThere is no getting around the fact that a sizeable chunk of your income has to be spent on bills and everyday necessities such as food and travel. But once all of your bills have been paid for, how much of your income should be disposable? How much should you have left to spend on whatever you like?
The answer to that is entirely personal as everybody’s circumstances are different. There is a study that suggests you should spend 30% of your income after tax as disposable, but this is reliant on you only spending 50% of your income on bills. This is not going to be practical for a lot of people, but there is a way that you can boost your disposable income.
If you want a mantra to define the disposable income in the UK definition, it should be: ‘only spend what you can afford’. Your financial obligations are your priority so cut back on everything non-essential if you are feeling the pinch. The gym is not an essential, you can work out at home. Getting your nails done should not be prioritized over paying your credit card bill. Live within your means and save if you can. Many people struggle with debt after Christmas because there are so many things to buy and it can be difficult to manage.
Your disposable income debt ratio is your total debts divided by your gross monthly income. As an example, let us assume that you have £300 of disposable income to spend each month and of that £300 you need to pay £80 worth of debt payments. Your disposable income debt ratio is worked out like so; £80 divided by £300 multiplied by 100. This will give you a percentage of 26.66. Therefore, your disposable income to debt ratio would be 26.66%
The higher your debt to disposable ratio is, the harder you will find it to make your monthly payments and qualify for new credit. Lenders consider a ratio of 30% to be a good figure, but because lenders all have their own benchmarks for what is considered acceptable and what is not, this figure is variable.
Debt to income ratioTo work out your debt to income ratio there is a very simple formula to follow. Often shortened to DTI, it requires you to first work out how much monthly disposable income you have and how much you pay out on debts each month. You then divide the debt by your income and multiply it by 100 to get your grand total.
So, for example: You have £400 of disposable income at the end of the month and need to use £120 of that money to pay your debts.
Use the debt to income ratio formula to work out your own financial situation.
Let’s discuss how you work out your actual disposable UK income. The best way to do this accurately is to use an expendable income calculator, also known as a budget calculator. First, find out what your take-home figure is. If you get regular bonuses, try not to include these if they are not guaranteed.
You would do well to be completely honest with yourself when you are doing this as it could mislead you into thinking you have more disposable income than you thought. If you spend £50 a month on getting your hair done then put that amount.
If you spend £10 a month on lottery tickets, include that too. Don’t be tempted to think, ‘Oh, it’s only a tenner, I won’t miss that.’ Include every possible expenditure you can think of, and if you are rounding figures up round them up, not down. There is an excellent free expendable income calculator you can use at:
Budget calculatorIf you are in a position where your debts are mounting and the only solution you can think of is insolvency, there may be one thing stopping you. You may have heard that if you enter into an Individual Voluntary Arrangement that any extra cash you have left will be taken by your creditors. So, if you were wondering, ‘Do I have to pay all my disposable income into an IVA?’ the short answer is, ‘Yes’.
Once you have listed all of your outgoings the Official Receiver will make a judgement on whether they think you have enough disposable income left to make a contribution to your creditors. If they believe that you can realistically do this, then any disposable income will be used towards paying your debts.
However, much the same as when you are using an expendable income calculator you must be completely honest when providing your expenditures as it can actually work in your favour. The Official Receiver lets you have small allowances for what you might not consider an essential expenditure and you may be surprised at to what constitutes an allowance.
Things like:
are all allowed to be considered as regular expenditures. Once you factor in these allowances, your disposable income may not be as high as you think it is.
If you live in Scotland and are thinking of insolvency as a way to sort out your financial situation, it is slightly different to the rest of the United Kingdom. An insolvency practitioner will help you to make payments to your creditors over the course of three to four years but they charge for their services out of your monthly payments. These charges vary so it’s a good idea to shop around for the best rate.
For advice on calculating disposable income for Scottish Trust Deeds, it’s a good idea to use a disposable income calculator. To be taken to the official Scottish Trust Deed website and to use their free calculator to see if you qualify for a Trust Deed, use the following link;
Trust deed calculatorThe most helpful thing that you can do to sort out your finances is by working out your disposable income for debt management plans. You must do this with the highest degree of accuracy because debt management plans tend to last for a number of years. If you miscalculate or leave an expense off that you forgot about you are in real danger of leaving yourself in an untenable position.
The easiest way to sort out your finances is by using a calculator to work out your disposable income for you. They normally have a breakdown of the different categories such as mortgage or rent, groceries, travel, child care costs etc. From there it will work out how much disposable income you have left.
Try working out your disposable income for a debt management plan today by visiting the following link:
Budget plannerYour disposable income is the amount of income that is left after paying taxes and making essential purchases. If you are trying to work out your budget then it is essential that you calculate this figure correctly.
Try to base it on guaranteed income like a steady wage. If part of your income is variable, if you are self employed or get performance related bonuses for example, try not to overestimate these figures. Use a figure that is attainable each month so that anything above that figure is a luxury.
If you are considering some form of insolvency then being honest with your figures might actually work in your favour. The more you have going out, the less disposable UK income you have by definition, so don’t skimp on anything no matter how trivial it may seem.
