What is Disposable Income?

Disposable income is the amount of money that an individual or household has to spend or save after income taxes have been deducted.

Sometimes referred to as disposable personal income (or DPI) or disposable earnings, disposable income is closely monitored by government economists because it is a key indicator of the overall health of the economy.

Disposable income is also the foundation of your personal budget, as it is the starting point for how you decide to spend your money.

Understanding what disposable income is (and how it differs from discretionary income) is key to creating and living comfortably within your budget.

Read on to learn how to quickly calculate your disposable income, and then use this number to work towards your financial goals.

Why Disposable Income Is Important

Disposable income is usually defined as the amount of money you keep after federal, state, and local taxes and other mandatory deductions are subtracted from gross earnings.

401(k) contributions, deductions for other employer-sponsored benefits, as well as any assignments of support (such as child support) are excluded from the calculation. These costs are considered part of your disposable earnings.

Disposable income is an important number not just for consumers, but also the nation as a whole.

The average disposable income of the country is used by analysts to measure consumer spending, payment ability, probable future savings, and the overall health of a nation’s economy.

International economists use national measures of disposable income to compare economies of different countries.

On an individual level, your disposable income is also a key economic indicator because this is the actual amount of money you have to spend or save.

For example, if your salary is $60,000, you don’t actually have $60,000 to spend over the course of the year.

If you live in Connecticut, for example, you would pay $6,187.50 in federal income tax, $2,100 in state tax, $3,720 in social security tax, and $870 for medicare. Your disposable income could land at $47,317. This is what you would have to spend on everything else in your life, such as housing, transportation, food, health insurance and other necessities.

Of course, that doesn’t mean you should spend all of your disposable income. Another thing to consider is disposable vs. discretionary income. This will tell you actually how much money you have to play with.

Disposable Income vs. Discretionary Income

Although they’re often confused with one another, disposable income is completely different from discretionary income.

While disposable income is your income minus only taxes, discretionary income takes into account the costs of both taxes and other essential expenses. Essential expenses include rent or mortgage payments, utilities, groceries, insurance, clothing, and more.

Discretionary income is what you can have leftover after the essentials are subtracted. This is what you can spend on nonessential or discretionary items.

Some costs that fall under the discretionary category are dining out, vacations, recreation, and luxury items, like jewelry. Although internet service and your cell phone may seem like necessities, these expenses are considered discretionary expenses.

As you might expect, discretionary income is always less than disposable income. When you subtract discretionary income from disposable income, the amount you come up is how much you can put towards savings.

Calculating Disposable Income

Disposable earnings refers to the amount of earnings left over after mandatory federal, state and local deductions. But disposable income is not necessarily the same as your take-home pay.

Deductions from your paycheck may include additional items such as health insurance, retirement plan contributions, and health savings accounts. These deductions are voluntary, not mandatory.

To calculate your disposable earnings, you can simply subtract federal, state and local taxes, Medicare, and Social Security from your gross earnings. The resulting amount is your disposable income.

You may want to keep in mind, however, that taxes deducted from your paycheck are an estimate.

If you have a history of getting a large refund or having a large amount of taxes due, it may be worth reviewing your withholdings through your employer.

This could help you adjust the withholdings so it is closer to the actual expected tax that will be calculated when you file. You can then plan accordingly.

Even if you’re a contractor or freelancer, or if you made additional income from side gigs along with your salary, you can still calculate your disposable income.

This requires subtracting your quarterly tax payments and any additional taxes you will owe from your overall income. You can then determine your monthly after-tax income.

Setting aside money to pay taxes can also help you budget with your disposable income.

Disposable Income Budgeting

Calculating your disposable income is a key first step in preparing a budget. You need to know how much you have to spend in order to plan your monthly spending and saving.

A personal budget puts you in control of your disposable income and helps you make financial decisions. It forces you to take a closer look at how you’re spending your money.

Here are a few ideas that could be helpful when developing a budget based on disposable income.

Tracking Spending

Disposable income is what’s coming into your account every month. It’s a good idea to also determine what is going out each month.

To do this, you can gather up bank and credit card statements, as well as receipts, from the past three months or so, and then list all of your monthly spending (both essential and discretionary/nonessential).

track your spending for a month. You can do this with a phone app, by carrying a small notebook and jotting down everything you buy, or by saving all of your receipts and logging it later.

This can be an eye-opening exercise. Many of us have no idea how much we’re spending on the little things, like morning coffees, and how much they can add up to at the end of the month.

Once you see your spending laid out in black and white, you may find some easy ways to cut back, such as getting rid of subscriptions and streaming services that you rarely use, brewing coffee at home, cooking more and getting less take-out, or getting rid of a pricy gym membership and working out at home.

Setting Goals And Spending Targets

Tracking income and spending can provide a great starting point for setting financial goals and spending targets.

Goals are things that a person aims for in the short- or long-term—like paying off student loans or buying a new car.
Spending targets are how much you want to spend each month in general categories in order to have money left over to put towards your savings goals.

Since essential spending often can’t be adjusted, spending targets are typically for discretionary income.

One option for budgeting disposable income is the 50/30/20 plan. This suggests spending about 50% on necessities, 30% on discretionary items, and then putting aside 20% for savings and other long-term goals.

These percentages are general guidelines, however, and can be adjusted as needed based on individual circumstances.
For example, if you live in a competitive housing area, rent may take up a larger portion of your expenses, and you may have to bump up necessity spending to 55% or 60% and decrease fun money to 25% or 20% instead.

Or, if you are saving for something in the near term, like a car or a wedding, you may want to temporarily bump up the savings category, and pull back unnecessary spending for a few months.

The Takeaway

Disposable income is a key concept in budgeting, as it refers to the income that’s leftover after you pay taxes.
Disposable income is distinctly different from discretionary income, which is what remains after you subtract other necessary costs from your disposable income. You might think of discretionary income as your “fun money.”

Knowing how much disposable income you have is the foundation for putting together a simple budget that allows for necessary expenses, having fun, while also saving for the future.

Want to get started budgeting, but not sure where to begin? Consider signing up for a SoFi Money® cash management account.

With SoFi Money, you can easily track your weekly spending right in your dashboard in the app.

SoFi Money also offers savings features like “vaults” that make it easy to put money aside for your short- and long-term financial goals.

Save, spend, and earn all in one place with SoFi Money.



SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com

Dear Penny: We Want to Travel Post-COVID, but He’s Too Poor

Dear Penny,

I’m 70 and a widow of six years. I was married for almost 43 years. Two years ago, I met a man from New England on a dating site who’s just a bit older than me. We’re both healthy and physically active. We love to dance, hike and visit new places.

He’s been married twice and has four children. He is very close to his kids, grandkids and siblings. I have met them and they are good, decent people. He has lots of friends and is very outgoing.

He’s self-employed with a business next to his home. He works when he feels like it. He would like to live and work in New England for four months and spend the rest of the time in Florida, where I live.

He doesn’t have much money. His Social Security is minimal. He saves it and lives off of the money he makes from his business and the settlement his ex-wife sends him, which will end in two years. His house is paid off, his expenses are low, and he is careful with his money.

My husband left me financially secure. We were always careful with money and never lived an extravagant lifestyle. I’ve got two adult children who are financially independent.

The man I’m seeing doesn’t have much disposable income and isn’t concerned about it. I’m not sure about a long-term future with him feeling this way. When this pandemic is over, we’d both like to travel and do more, but I don’t want to travel on the cheap. I’m not talking about fine dining and five-star hotels. Just something in-between. I have no problem paying my share, but not for both of us.  

He knows that I will never marry again and whatever money I have left will go to my children. When he is down here, he stays with me (he’s been with me six months, now). He buys half the groceries and many times pays for restaurants, so his monthly expenses may add up to $400. He does help around the house.  

Now that we have our vaccines, I went to visit my family, who live in another country. He decided not to join me, but he didn’t want to return home, either. 

I pointed out that this is his busy time for business and he should take advantage. But he says he has worked hard and it’s his time now to enjoy life.

Is this relationship doomed because of our differences in attitude on finances? Should we just enjoy what we have?

-Am I Too Old to Have It All?

Dear Am I Too Old,

You found a guy who isn’t rich, but does he make your life richer? Your letter screams “yes” to me.

You share the same hobbies. You like his family and friends. It seems like he’s an equal partner with you, even though he can’t pay 50% of the bills.

Your boyfriend sounds like someone who manages what little money he does have wisely.

He can afford his lifestyle — he just can’t afford your lifestyle. My alarm bells would go off if you were telling me that your 30-something boyfriend only works when he feels like it and says now is his time to enjoy life. But from a 70-something? Not so much.

What I want you to do is think about the next trip you want to take post-COVID. Would you have more fun if you took it alone, with the comfort of knowing you didn’t foot the bill for him? Or would you enjoy it more traveling together, even if that means you’ll pay for most of it?

I feel like you’re assigning a level of urgency here that doesn’t really exist. He’s already been staying with you for six months in Florida. He’s not talking about selling his home in New England. No one’s begging for the other person’s hand in marriage. You can plan a vacation, knowing you’ll pay for most of it, without committing your entire retirement to traveling together.

I don’t think your relationship is doomed — and age is a very big factor here. My answer would be very different here if you were in your 20s or 30s. If you were building a home, a nest egg and a family together, your differences on money could be too difficult to reconcile, no matter how in love you were. But in your 70s, it’s a lot more realistic that you can keep your finances separate.

Whatever you do, don’t pursue a future with this man if you think you’re going to change him. It sounds like money just isn’t that important to him. That’s not a character flaw.

You don’t always fall in love with someone in the same tax bracket. That means one person often shoulders a greater share of the expenses. But if this relationship truly makes you happy, that’s a small price to pay.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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Source: thepennyhoarder.com

What are the Average Monthly Expenses for One Person?

Everyone has different needs, responsibilities, and spending and saving habits. Still, you may wonder how your spending lines up with everyone else’s.

Or, if you’re in the process of creating a monthly budget, you may be looking to see roughly how much of your take-home income you should be setting aside for various living expenses.

To help you get a better sense of the cost of living for one person, we’ve assembled a list of the most common average monthly expenses.

Housing

We generally all need a roof over our heads, and housing tends to consume the highest portion of monthly income.

Indeed, according to the U.S Department of Labor , single people living alone (or with others but paying their own) may devote, on average, 35.9 percent of their monthly income to housing.

Government stats also show that the average household (from singles to families) spends about $1,723 per month on housing costs, including rent or mortgage, property taxes, maintenance and insurance fees, where applicable.

Of course, monthly housing costs may be less if you’re single, and can also vary significantly depending on where you live.

A single person living in a studio in New York City, for example, can expect to spend around $1,514 on rent, whereas someone renting a one-bedroom in Roanoke, VI, can expect to pay around $713 on monthly rent.

Transportation

Transportation costs can vary depending on your mode of transport (i.e., car vs. bus vs train), as well as what region of the country you live in.

But one thing that holds true for many of us–transportation often accounts for the second-largest budget item, after housing.

The average household shells out around $813 per month on transportation, including car or public transportation, gas, insurance and other related expenses.

Other transportation expenses to note:

•  Americans spend an average of $550 per month on new car payments.
•  Gas and fuel run around $176 per month on average.
•  Car insurance payments average $119 monthly.

Health Care

Health care expenses can vary depending on each individual’s circumstances, and can also rise and fall from one month to the next.

For example, there may be some months where unexpected medical costs crop up (such as emergency care), and other months where you only need to cover insurance premiums and preventive care appointments.

Cost also varies by location.

For instance, a single adult living in New York City can expect to pay about $425 a month on health care (including insurance premiums for the lowest tier plan, as well as out-of-pocket costs).

A single adult living in Boise, Idaho, on the other hand, can anticipate shelling out roughly $342 per month for those costs.

Food

Everyone’s gotta eat–and the average single person spends about $198 per month in groceries and $172 per month outside the home, for a total average of $370 per month.

This figure can range, however, anywhere from under $200 to over $700, depending on your age, income, gender, eating habits, and where you live.

The wide variability in spending in this category shows that food can be an area where consumers can find savings if they need to reduce monthly spending (such as eating out less, meal planning, and choosing lower cost brands at the supermarket).

Cell Phone

Average monthly wireless fees run between $35 and $140 for a family plan.

The good news? If your budget is particularly tight, you could spend as little as $10 a month for basic service with no data.

Utility Bills

After you’ve saved up and carefully budgeted to buy a home, you probably don’t want to be surprised by a higher-than-expected utility bill.

A number of factors go into utility costs, including home size, where you set the thermostat, type of insulation you have, the climate, as well as what part of the country you live in (since rates vary across the country).

New Mexico residents, for example, pay the least for natural gas (on average, $50 per month) and electricity (an average of $79.16 per month), while Hawaiians pay the most–due to the remote nature of the islands, electricity averages $149.33 per month and natural gas averages $223.07 monthly.

Clothing

The average adult aged 25 to 34 spends about $161 on clothing per month. Adults aged 35 to 44 spend a bit more, averaging $209 per month.

If your budget is tight, this is one category where you can often pare back spending–whether by shopping your closet, hitting the sales racks, or bringing older clothes that need repairs or fit adjustments to the tailor.

Gym Memberships

The average gym membership runs $58 per person, which could be a good deal if you use it regularly.

But weighing in at $696 per year, it’s a hefty price to pay if you rarely see the inside of that gym.

There are some great options for exercising on a budget, such as going outside and hitting the pavement, joining an exercise meetup group, watching YouTube videos, and/or picking up some dumbbells and exercise bands to workout at home.

Getting Your Monthly Expenses in Check

Knowing the average cost of living can be helpful when you’re trying to determine how much of your budget you may need to allocate to different spending categories.

However these average monthly expenses are just that — averages.

To fine-tune your budget, and make sure your spending is in line with both your income and your goals, it’s a good idea to track your own spending (which means every cash/debit card/credit card payment and every bill you pay) for a month or two.

There are a few options for tracking spending. One easy method is to make all purchases for the month on one debit card or credit card, then, at the end of the month, taking note of all the purchases made.

Another option is to log expenses as you pay them–you can carry around a notebook or keep all your receipts and list them later on paper or in a computer spreadsheet.

At the end of the month, you can then tally up everything you spent, as well as allocate each expense into key categories, such as housing, transportation, food, health care, etc.

You can then see how your spending compares to national averages, as well as where you might want to tweak things.

For instance, if you don’t have enough at the end of the month to put any money away into your retirement fund and/or an emergency fund or other savings goal, you may want to re-examine your nonessential spending (such as restaurants, clothing, gym memberships) and finds some ways to pare back.

The Takeaway

Whether you’re creating a new budget or refreshing an old one, you’ve probably noticed how important–and tricky–it is to get your monthly expenses right.

Knowing the average amount people spend to live can help you figure out how your spending stacks up and, if you’re just starting out, help to ensure you’re budgeting enough for each category.

To see how your actual spending compares to national averages, you may want to track your daily spending for a month (or more), and then put all your expenses into categories.

You may then decide to set up certain spending limits to keep your spending in line with your income, as well as your savings goals.

If you need help with tracking your spending, a SoFi Money® cash management account may be a good option for you.

With SoFi Money, you can easily see your weekly spending on your dashboard, which can help you stay on top of what you are spending and make sure you are on track with your budget.

Learn more about how SoFi Money could jumpstart your financial management today.



SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Source: sofi.com

How to Approach Divorce and Retirement and Protect Your Savings

We’ll start with the bad news: Divorce rates for people in their 50s have doubled since the 1990s. And a recent study from the Center for Retirement Research at Boston College found that divorce correlates with the likelihood of financial risk in retirement.

So you’re nearing retirement and you’re getting divorced and this divorce may wipe out your retirement savings? Wait, there’s good news: It doesn’t have to be that way. When you’re getting divorced, there are ways to protect your future.

Here’s what you need to know about divorce and retirement.

Hard Truth: You’re Going to Have to Share Your Savings

Retirement savings are typically part of what’s known as your equitable distribution calculation.

Translation: Unless your retirement funds weren’t accumulated during your marriage, an ex-spouse will have the rights to them, says Dmitriy Shakhnevich, a New York-based attorney. “This is because, in theory, the idea is that if parties are married then the accumulation of assets by one party becomes marital property, the same way a car or a house would.”

So when you get divorced, don’t be surprised if your ex is entitled to half of your 401(k) (considered to be joint property) that was accumulated during your marriage — even if he or she didn’t work at all. The big exception is if you had a prenuptial agreement that discussed this.

Those are the rules — but there are ways to make divorce and retirement coexist harmoniously.

Don’t Use Your Retirement Funds to Pay for Your Divorce

Often, divorcing couples pull money out of retirement accounts because they simply don’t have other available liquid funds to handle the substantial expenses of a divorce — or because one or both parties become very litigious, says Dori Goikhman, an attorney-mediator and founder of Off the Record Mediation Services based in Silicon Valley.

“If a divorcing couple pulls money out of retirement plans improperly, they may be hit with tax penalties, and may also be liable for income tax which would otherwise be deferred,” Goikhman said. “They may also lose the potential for tax-free/deferred growth, depending on the nature of the plan.”

If the couple attempts to split their retirement plan assets without a proper divorce decree and court order, they may also end up subject to penalties. Essentially, division of retirement plans is complicated and should be handled by an experienced professional to avoid substantial fines.

File ASAP

If you’re preparing for a divorce and making contributions to a retirement account, you need to file as soon as possible, because any post-filing contributions made to the account are not divisible with your soon-to-be former spouse, says Rajeh Saadeh, a high stakes divorce and family attorney in New York and New Jersey.

In other words, once you’ve filed, any money you add to that retirement account is 100 percent yours. So keep contributing!

Continue to Save

Many people who are going through marital problems tend not to continue saving for retirement strategically, as they know these savings would be divided in the divorce anyway, Saadeh says.

More specifically, in a divorce, retirement assets accumulated during the marriage are divided no matter whose name is on the retirement accounts.

Enter into a Qualified Domestic Relations Order

Retirement savings are usually in the form of tax-deferred accounts such as 401(k)s and IRAs. These accounts can be split between a couple, but you may only split the portion that was contributed during the marriage, aka the marital portion.

But it’s incredibly difficult to determine what the marital portion is when both the marital and non-marital portions have been growing in value. So don’t just split your retirement plan 50/50, says Russell Knight, a divorce attorney based in Chicago.

“The only way to truly determine the amount is to enter into a Qualified Domestic Relations Order (QDRO),” Knight said. “A QDRO will empower the retirement plan manager to use actuarial software to determine the marital portion to the penny on the date of the divorce.”

Then, the manager will create a second retirement plan for the divorced spouse, and transfer their portion to the new plan.

This is What Happens Without a QDRO

To split the pension or 401(k) in a divorce without tax consequences, the spouses need to get a QDRO. This allows the account to pay out the money to the other spouse without tax issues.

If this is not correctly completed and accepted before the divorce is final, then the money moves with a tax consequence, says Beth Logan, author of “Divorce and Taxes after Tax Reform.”

“Let’s say Drew, age 46, has to pay Chris $150,000 from Drew’s 401(k),” Logan said of a situation without a QDRO in place. Now, Drew has to pay federal taxes, a federal tax penalty of 10 percent for withdrawing the funds before turning 59 ½, and possibly state tax. “That can easily be 30 percent or $45,000,” she said.

Where will Drew get $45,000? Probably by draining the retirement, which will trigger more taxes.

A good tax professional should look at the expected after-tax value of the retirement fund and split the savings so the couple pays the least taxes now and in the future. This may result in one spouse getting all the Roth income while the other gets the 401(k), for example. Or it may result in one spouse getting the entire retirement while the other gets the cash the couple accumulated – which may appear unfair, but in the end will result in more money for each.

“It is important to know the timeline to retirement and other plans along the way,” Logan said.

Attempt to Limit the Length of Your Divorce

Arguing over assets may end up costing more than the assets themselves, said Adam Citron, a partner at Davidoff Hutcher & Citron LLP in New York.

“Many times, parties will ultimately withdraw from and deplete savings and specifically, retirement savings, in order to continue to fund the litigation and pay the attorneys’ costs,” he said.

It’s important to keep your sights on the big picture, and evaluate decisions from a business perspective, rather than an emotional one.

Danielle Braff is a contributor to The Penny Hoarder.

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Source: thepennyhoarder.com