Having regular discretionary income each month is great – but what should you be doing with it? It essentially boils down to three very different choices: spend, secure, or save. Paul Hardy explains the lasting impact investing can have on your long-term financial health.
‘How much disposable income should I have?’
Regular disposable income is a wonderful reward for a job well done – especially in the current economic climate. However, while it may be tempting to spend frivolously, having additional funds at your fingertips gives you the option to secure your own financial situation in the short term. What is classed as disposable income? After you’ve covered your basic expenses, any funds that you can spend at your discretion without impacting your quality of life qualify as disposable income.
Disposable income presents the chance to build a plan for longer-term financial well-being; the latter is especially important, as it also impacts the people closest to you.
These will, of course, vary for everyone, but it comes down to understanding your current financial situation and your goals. While it’s important to remember that there is no right or wrong amount of disposable income, this is likely to be influenced heavily by your age and circumstances, such as:
Age 13-17, teenagers learning the basics
– Low level of financial income
As children, we typically save for hobbies and interests. This helps to learn the importance of money in an environment in which we are supported financially by parents or guardians. If you have children under the age of 17, I’d advise you to explore setting them up with a Children’s Individual Savings Account, or standard children savings accounts.
Age 18-25, young adults aspiring for more
– Entering the workforce
At this age, you’re probably starting to think more proactively about work and careers, all the while becoming more independent and laying the groundwork for your future aspirations. While spending is more fun than saving, those with foresight may consider investing early to save for a house deposit, and it’s never too early to start saving for retirement. You should be aware of how powerful pensions are and how employers can start to provide a key long-term savings plan for them. If you’re between 18-25, I’d suggest investing your disposable income in a Help to Buy ISA, Lifetime ISA or your pension.
Age 26-45, securing your family and foundations
– Family career building
By this age, most of us will have savings goals that hinge around supporting our financial well-being while providing for dependants. In this stage of life, it pays to invest your regular disposable income into key concerns such as mortgages, life insurance & protection, pensions (children and adults) and savings, not forgetting contingency savings (i.e. your ‘rainy day’ fund).
Age 45-64, approaching pre-retirement
– Pre-retirement
By now, most of us will typically be earning higher wages through experience, looking to grow our money as best we can and/or securing enough assets to provide for retirement. While having a financial adviser is always a good decision, at this time it can become critical for ensuring you have the funds you need to live comfortably and well as you draw closer to retirement. If you’re approaching retirement, the most pertinent places to invest your disposable income is in your pension, life insurance & protection, by gifting it to children or intelligent tax planning to maximise your take-home pay.
65+, entering retirement and later retirement
– Living comfortably and enjoying life
Before and indeed during retirement, it’s vital to look carefully at your overall wealth to see how much money you have. This enables you to match it to the lifestyle that you anticipate having, and make any necessary adjustments.
It could also be that passing on your wealth is important to you, which is a natural concern when it comes to asset and estate planning. At this stage in life, any surplus income can be best used for consolidating different funds into a larger, self-contained (invested) pension pots, gifting it to family or further retirement planning. Special attention should be paid to Inheritance Tax Mitigation as well as Wills & Power of Attorney.
Wealth initiation, consolidation and fulfilment
Whatever stage of life you’re at – whether you’re looking to build wealth, consolidate assets or enjoy living comfortably well into your retirement – sound financial guidance should always be customised specifically to you and your circumstances – especially if you’re unsure of what to do with disposal income.
The importance of informed financial advice is really two-fold:
- It ensures that the advice and products you’re exploring are suitable to achieve your intended goal;
- It builds a financial plan which creates a relationship with a trusted specialist in the knowledge that their financial well-being is being looked after over time.
You may not be aware of the fantastic opportunity that you currently have to build your wealth and secure your financial wellbeing into retirement.
Get in touch with our award-winning team of financial planners today to begin exploring the building blocks to help support your future.