The term "disposable income" has a wide variety of meanings to many people. Dictionaries generally define disposable income as the income left over for savings after taxes and required expenses are deducted. The trouble with this definition is that it considers savings a discretionary item. Anyone who plans to retire one day (and does not expect a large inheritance before they reach their desired retirement age) needs to treat saving as a mandatory, fixed expense.
Too often, money allocated to savings and investments is an afterthought (at best) with any money available after all bills and entertainment expenses are paid. Instead, investments and savings should be considered regular monthly bills that need to be paid before non-essential expenses are accumulated. Retirement is not going to magically take care of itself, just as social security will not resemble its current structure in 25-30 years, if not sooner. People who do not save will not retire and be able to live any lifestyle similar what they are used to. In addition, these non-savers will leave nothing to their children and the cycle of financially struggling will continue for generations.
Without savings included as part of disposable income, the definition becomes clearer. Disposable income is the income available for non-essential expenses after taxes and required current and future expenses are deducted. The current cost of future expenses is accounted for on a time value basis with an estimated rate of return that fits historical averages for market returns and inflation and the investor's risk acceptance levels. Current required expenses include the costs to live, such as housing, healthy food, medical, basic transportation, basic clothing and insurance. Disposable income is used to pay for entertainment, vacations, eating out at expensive restaurants, cable TV, new cars, alcohol, non-essential clothing purchases, the latest cell phones and other unnecessary grown-up "toys".
To some, this may sound like saving for the future comes before current "fun". While there is a hint of truth to that statement, it doesn't have to be black and white. Small changes that exclude gluttonous spending can make a massive difference. It's not a pretty thought for most non-savers, but if people cannot find money to invest based on their income and still have fun, fixed expenses have to be reduced if income cannot be raised. For those who are far behind on their savings goals, major steps might be to move into a smaller house and drive a more economical car. Saving for future expenses is not a luxury, a big house and a "fancy" car are. For those who have saved some, but are not quite where they need to be yet, simple steps can include eating out less often and cutting out impulse purchases. Any charges to a credit card that cannot be paid in full fall outside of disposable income spending.
It might not look good compared to friends who spend more freely, but the one who is able to retire early will have the last laugh. It comes down to the choice between saving money now and working into one's 70s or 80s. Those who understand the true definition of disposable income have a better understanding of the benefits of delayed gratification. These disciplined savers will be happier long term without financial stress.
