Disposable Income

What is disposable income? It is the amount of money that households have available for spending, saving and investing after income taxes and mandatory payments (i.e. mortgage, food, transportation and health insurance) are accounted for.


A recent survey initiated by Money Magazine disclosed that the disposable income of American households is disbursed as follows:

Travel: 30%

Home and Beauty: 22%

Eating Out: 20%

Clothing: 17%

Recreation: 11%


Did you notice anything missing?  Yes, you got it!  Based on this survey most American households apparently aren't using any of their disposable income  to put towards savings or investments.  We can not expect our finances to grow if there is no system of saving and investing.  


This is  a huge problem that will result in Americans having to work far longer than their parents and grandparents had to.  Let's get in front of this and begin developing a plan to save and invest.

What To Do With Your IRS Refund!

With tax season upon us, this is a good opportunity to talk about the use of your tax return.  Retailers are expecting taxpayers to purchase a bunch of big ticket items.  Take my advice, don't do it.  Here is what I propose if you are expecting a tax refund this year.


Donate 10% of your refund amount to a charitable organization

It is always a good idea to give to those who are less fortunate than us.  The easiest way to do this is to select a charity you believe in and donate the 10%.  Giving back makes you feel good and also provides another deduction during the current tax year.


Take one third of the remaining amount to apply against your outstanding debt

If you have any outstanding debt (i.e student loans, credit cards, mortgage, etc.) take a third to apply against it. Any extra amount that can be applied to your debt will help to retire it earlier.   Remember you can't retire until you retire your debt.  


Take the second third of the remaining amount and place it into a retirement account

This is a must, because that are so many Americans that haven't put enough money away for retirement.  The problem is that many of them don't discover this until it is too late.  In a recent report from Fidelity Investments, 55% of Americans don't have enough money saved to cover their basic needs in retirement.  Let's start aggressively saving for retirement.


Take the last third of the remaining amount and save it for a rainy day fund

When you read the financial news and tune into financial broadcasts you will gather that rainy days are coming.  In fact for some torrential rain is ahead.  Because of this you should start or add to a rainy day fund.  This fund is in place to cover your essential living expenses for three to six months, in case something happensthat causes your income to decrease.  

The rainy day fund is different for an emergency fund.  The emergency fund is for those items that jump "pop up" from time to time - car repair, leaky roof, etc.


I would use this same approach for any unexpected money that is received during the year also.  Follow this approach and watch three things happen: (1) debt will be retired faster, retirement account will become healthy and your rainy day fund will provide the umbrella you and your family need to survive.

Grow Your Money Tree

It is a fact that most of us will have several hundred thousand dollars pass through our hands in our life time.  You don't believe me do you?  Well lets say you work for the minimum wage ($7.25 per hour), full time (40 hours per week) for the next fifteen years.  If you did that you would have earned $226,200.00.

With that knowledge you and I both most figure out a way to grow our money tree. There are several obstacles that are trying to kill the growth of our tree: bad money choices caused by hereditary and environment, debt, clear understanding, etc.

We can clear up bad money choices with continued exposure to information that will increase your financial literacy. In this post I want to challenge your understanding and debt.

Some people, professional and otherwise, will tell you that you should pay off all of your debt first before you can grow your money.  I believe that this is poor advice for most people.  You should develop a strategy where you are reducing debt, saving and investing for growth simultaneously. Work with someone who can help you develop this strategy

This way your money tree has the best chance of growth.

Also please keep in mind these three principles:

1. The fastest way to increase wealth is to invest.

2. There is a significance in making more money and increasing wealth.

3. When you start to invest don't get discouraged if you are not able to be a part of the "big deal".  A few "small deals" can put you in a position to be part of the "big deals".

Image courtesy of ddpavumba at FreeDigitalPhotos.net

Get Out of Debt Card

Growing up in the Monopoly playing generation I, along with many others were conditioned to believe there was a “Get Out Of Jail Free Card.” That type of conditioning has transferred to the next generation in terms of debt. Many commercials, Internet posts and talk from industry professionals portray that the process of getting out of debt can occur without making any major adjustments. Please don’t be fooled, as this is not true.

There are three adjustments that must transpire if you intend to get out of debt:

Reduce spending – You might have heard this one before from me or someone else: Take a serious assessment of your weekly and monthly expenses and decide what expenses are in the “Need” category and which are “Wants”. Eliminate all the “Wants”, at least for now. Also, I would research alternatives to the items on your “Need” list. For instance a telephone might be on your “Need” list. However, you might want to consider VOIP (voice over IP) as an alternative.

Create revenue – In addition to reducing your spending, it is important to seek ways to create revenue. List the things that you like to do or that you do naturally. Seek a coach that will review the list with you and determine ways of producing income from a given area.

Change perspectives – This might be the most difficult of the three adjustments to accomplish. Getting out of debt causes a change of lifestyle as we will have to adjust some things. This new perspective on spending and money will be invaluable to you over a period of time. You might also need to speak with a coach here as well.

Getting out of debt will come with a short term cost but long term it will be more than worth it.