Disposable Income is a Dangerous Concept

By December 2, 2016Budgeting, Financial Planning

Disposable is a terrible descriptor for excess income. If we’re not careful, the excess income we earn over what we need can become a trap. More often than not, we’re going to spend excess money on something. If we’re lucky, it’s a one time expense with no further commitments.

However; the initial expense can sometimes just be the beginning. The first check we write may be followed by 59 more monthly payments, continual upkeep expenses, or other costs associated with a new found toy, interest, or hobby. Almost instantaneously, we have created additional financial commitments that are not disposable anymore. If we are not able to sustain these additional expenses, tough choices arise and we may end up worse off than we started.boat

Most of us have fallen into this trap at one time or another. A better approach is to plan out excess income into a sustainable higher standard of living. Here are some planning steps you can take towards deploying excess income:

  1. Prioritize. Sounds easy, but prioritization is anything but simple because for one thing, it usually involves negotiation with your spouse. The deployment of funds is best done as a family decision towards priorities that make sense to everyone.
  2. Plan. We need to make sure we understand what we are getting into. If it’s a parcel of land, what are the taxes? For a new boat, how much is it going to cost for storage and upkeep? Planning allows us to step back and really justify the purchase, thus ensuring alignment with our values and priorities.
  3. Execute. Is the purchase a top priority for the family? Does the plan work? If you answer “yes” to both questions then execute! Sometimes, the longer and more complex process of prioritization and planning gets tripped up by our busy lives, but if the process points towards going forward, don’t hesitate.
  4. Monitor. After some time has expired, go back and check your notes. Make sure your purchase is working out as expected, and make some adjustments if necessary.
  5. Re-prioritize. Family priorities change. You built some great memories and had fun, but maybe your interests have changed so it’s time to sell the ski boat. Don’t be afraid to alter how you allocate your excess income so you can grow and find new and exciting ways to use your resources.

It’s dangerous to think of excess income as disposable. If we don’t value or appreciate the income we receive over and above our needs, we’ll waste it, or worse, we’ll unwittingly create an ongoing unaffordable obligation. It’s better to use excess resources strategically so it can create a lasting impact on the quality of life for our families.