Saturday, April 2, 2011

Moola Lingo: Disposable Income

What do unicorns and disposable income have in common? Like most things, the answer to that question depends on language.

What is a unicorn? A unicorn is an imaginary creature that is usually depicted as a horse with a spiral horn growing out of its forehead.

What is disposable income? Good question. Here are a few definitions of "disposable income" that I found on the Web:
"The amount of income left to an individual after taxes have been paid, available for spending and saving" (InvestorWords.com).

"Gross income of an individual from which direct taxes have been deducted." (BusinessDictionary.com).

"The amount of money that households have available for spending and saving after income taxes have been accounted for" (Investopedia.com).
In money-speak, disposable income is a term that refers to your after-tax income. It's what you have left to spend on essentials and non-essentials (and to save, if you're lucky) after you pay your taxes. But getting back to our original question about what unicorns and disposable income have in common, let's break down the language a little bit further to find out why this misnomer, "disposable income," is so very annoying.

Money You Throw Away?
Disposable means that something has been designed to be thrown out after being used, such as a "disposable" diaper. You use it once, you throw it in the diaper genie. Income is money that comes into your life in any way, be it earned actively or a gift or some other passive form of positive cash flow. Literally, then, the term disposable income seems to mean: money that you throw away. Like unicorns, disposable income understood in this way is truly imaginary. Who, after all, has money to throw away?

But that's not what disposable income means in money-speak, as you can see from the above definitions.

Given the confusion created by the word "disposable" and the irritating specter of tossing cash into the diaper genie or other trash bin (which I have done accidentally), perhaps our after-tax money should simply be called "net income." But the term net income is already taken.

Net income is the amount of income we pay taxes on (gross income minus deductions and credits) so disposable income is what's left after you pay tax on your net income. We need another term.

Another option may be to call our disposable income, simply "my money." Once I pay income tax, the money that is left over is truly mine and that's an empowering thought, which is not imaginary at all.

So the next time you're talking to your accountant or financial advisor, and the term "disposable income" rears its irritating head, just remember that disposable income is not meant to be disposable...it's simply your money and you can do whatever you want with it. You can even throw it away!

Copyright 2011. Laura Thomas. All Rights Reserved.
For reprint permission contact money@agentstory.net.

3 comments:

  1. I have always hated this term....thanks for clearing some of this up for us.

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  2. Why don't they call it net income -- income net of deductions?

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  3. @Perfect Mom. Now that is a bold e-name. Love it! Your idea is good, but "net income" is already taken. I'm still hoping my idea of calling disposable income simply "my money" will catch on.

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