How to Increase Your Disposable Income

Although it’s not the only factor in deciding how wealthy an individual is, disposable income does have a significant influence. If you have little to no money left after taxes and expenses, then it’s hard to save and invest for the future. In this article, we’ll look at four ways you can increase your disposable income.

Key Takeaways

• To increase your disposable income, try to get a raise.
• You could also take on a second job.
• You could start a business.
• You could try to make money by investing.
• Or you could spend less.

1. Get a Raise–or a Second Job

There’s no shortage of books and articles that give advice about getting more money out of your employer. Their counsel includes everything from dressing well to taking a pay cut in exchange for performance bonuses. One of the most highly touted techniques is to go for further training or education. This can cost you money now, but it will hopefully translate into higher wages and a more secure position in the company.

Regardless of how you go about it, getting a raise is the most obvious way to increase your income. Along the same lines is the possibility of having another job on the side. Working two jobs in tandem can be physically and mentally draining, but it will bring in more money when you need it.

The problem with increasing your income through your job is that you expose yourself to increased income taxes. The loss resulting from entering a higher income tax bracket is not prohibitive, but it can be discouraging. You are working harder and often longer hours, but the returns on your effort are diminishing as your income tax rate increases. Basically, you have to work harder just to add a little more to your pocket.

This is often made worse by the fact that many people never really profit from extra wages, because their lifestyles adjust to absorb it. You spend more as you earn more.

2. Start a Business

Starting a business, even a small one, can boost your income. Much like a raise or a second job, running a business will put more demands on your time and require more effort. The difference is that you will see more of the income from your labor because taxation for business owners is a small pinch when compared to the slap that the Internal Revenue Service (IRS) gives to employees. Some of your business write-offs can even be claimed against other income sources, but you have to follow the rules carefully.

The major drawback of starting a business is that there is no guarantee of success or income like there is with a raise or a second job. Entrepreneurial ventures take a certain type of person, one with the motivation and the ability to handle the details involved in implementing an idea. The time, effort and nerves that it takes to run a business (that has no certainty of success) means that very few people will take this route.

3. Investment Income

Investment income is considered a form of passive income. That’s a bit of a misnomer, because it does take active effort to create income from investing–you have to research investments, build and maintain your portfolio, etc.–but it does take less effort than many other jobs. Investing income can come from stocks, bonds, real estate, or many other types of assets. The common theme is that they ideally produce a return on the money you put into them.

Creating income through investing is a process of accumulation. Even if you consistently get a return on investments (ROI) of 20%, if you only have $1,000 in the investment, you will add a little less than $200 to your yearly income after any fees and taxes have been paid (and there is no guarantee of consistent returns of even 10%).

Searching for stocks with a history of dividends, sometimes called income stocks, can help create some income now, but it will still not be as rapid in results as a second job.

As you put more money in, however, more money comes out in the form of returns. Investing is a great way to increase your disposable income in the long run, but it won’t do wonders for your immediate situation unless you have a huge chunk of capital just sitting around. Investing takes patience, time and discipline. That said, it is one of the surest ways to gradually add to your disposable income without exerting yourself too much.

4. Spend Less

Tightening your budget will take some effort in the form of sacrificing a few luxuries, but the positive impact on your disposable income will not require longer hours or incur any extra tax. The more after-tax dollars you hold onto, the easier it is to do things like investing to secure more income in the future.

What Is Lifestyle Creep?

Lifestyle creep is when you spend more as you make more. With more income comes a lifestyle boost—and in many cases, you don’t even realize it’s happening.

What Is a Budget?

A budget, simply put, is a spending plan. You make it after you track how much you spend—that’s how you make sure your budget is realistic. And it’s important for it to be realistic, or else you won’t stick to it.

What Is the 50/30/20 Budget?

50/30/20 is a budget that recommends how you should spend your money. Under this budget, half of your take-home pay should be earmarked for needs, 30% should be earmarked for wants, and 20% should be earmarked for savings.

The Bottom Line

Of all the ways to increase your disposable income, the simplest one is by far the best. For you, that might mean spending less. After all, spending less isn’t going to affect your taxes or require more of your time. Others may see a second job as more ideal. Whatever you choose, stick with it. Be patient, and course-correct when necessary. Soon enough, you’re have the disposable income you’re hoping for.