Disposable income is the amount you can afford to pay towards your debts each month. You should calculate this before deciding which debt solution to use.
- What is Disposable Income?
- How to calculate your Disposable Income
- Understand your monthly income
- How to complete your Living Expenses budget
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What is Disposable Income?
Your disposable income is the money you have left over after all your essential monthly living expenses are paid. It is sometimes called surplus income.
Disposable income is the cash you have available for paying your debts. If you have no debts it is what you can afford to save or use to pay for non essential things.
It is vital that you know what your surplus income is so you can budget properly and make payment promises you can keep.
If you need to spend more than your disposable income on repaying debt you will run out of cash before the end of the month. You should then consider using a debt solution.
How to Calculate your Disposable Income
Disposable income is normally calculated on a monthly basis. The calculation is actually relatively simple. You just deduct your total essential living expenses from your total monthly income.
If your total income is £2000 per month and your total essential expenses are £1700 your disposable income is £300 per month: £2000 – £1700 = £300
The hard part of this is ensuring that the income and expenses figures you use are correct.
How to Calculate your Monthly Income
You calculate your monthly income by adding together all the different forms of income that you receive each month. You should include all your sources of income such as wages after tax, benefit payments, tax credits and pension payments.
If you receive any of your income weekly or bi weekly you will need to convert this into a monthly figure. You do this by multiplying the weekly amount by 52 (weeks of the year) and then divide that figure by 12 (months of the year).
If the amount you earn changes then you should use an average figure. For example if you earn overtime but this varies from month to month you should include a prudent average based on the payments received over the past 12 months.
You should only include income you can count on receiving. If you get irregular overtime or bonuses the payment should not be included. This is because the income cannot be guaranteed every month.
How to complete your monthly Living Expenses Budget
Your monthly living expenses budget is the total all of the essential living expenses that you pay each month. These include your priority debts such as rent, mortgage and utility bills. They also include your food, transport costs and child minding expenses.
You do not include payments to your unsecured creditors in this budget. These should be listed separately and paid out of your disposable income.
It is vital you calculate your living expenses accurately. If the figures are wrong your disposable income will be incorrect. For a full list of the expenses that should be included download our Living Expenses Guide.
What if you pay some of your expenses weekly?
If you incur expenses on a weekly basis (for example the weekly shopping or petrol) you will need to work out what you spend per month and include this figure in your budget. You do this by multiplying the weekly figure by 52 (weeks) and then dividing by 12 (months).
£80/week x 52 = £4160 divided by 12 = £347 a month (not £80 x 4 which would be £320)
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