Disposable Income

I had some time this week to go and calculate my budget for the next quarter. I had to enter in the last month of 2010 into my tables before I could start my analysis. I started playing around with the numbers and made some projections in the form of statical regression tables. What I came up with, and what I found, was not as encouraging as I hoped for. In fact, I felt sick once I was done.

Just using the raw data from 2007 to 2010, I found that my disposable income has significantly dropped downwards by just over 6 percent. This is a huge number on so many levels. Disposable Income is a term that I use to describe what is left over once all costs for living expenses are paid out versus the total sum of Income over an annual bases. My data is very simple to calculate because I only deal with cash. I use no other forms of credit, or personal financing, in my personal income/outcome costs. This, I feel, is a more truer measure of disposable income than that of a person who deals with using Banks Instruments because my money can be designated for cost of living, or extra expenses; where as a person who uses credit for financing would have “carry-over” issues that are far more complicated to calculate than my own.

The other surprise that I found was that without including the rate of inflation, i.e., gas, electricity, taxes, each change in lifestyle made to compensate the total reduction of income over expenses actually kept in pace with the national trend of inflation, right to the percentage point. So, whenever I made cut-backs to electricity usage, adjusting balanced my monthly budget, the drop in personal disposable income seemed to match the national trend regardless.

What does this mean for the economy as a whole?

If every Canadian followed my formula of finical management, and brought their household debt rates to zero, as I have have, then the economy as a whole would collapse.

My argument is this:

My spending is continually brought into line with my gross income, and is paid directly to me. I only take home cash. The money that I earn is the total amount of income that I spend. So ancillary costs are less than $5.00 per month, which are items such as Bank fees. Most financial corporations would fail as consumers would stop using their basic services.

  • With the reduced Disposable Rate, now at 23.8 percent, this means that less than of a quarter of my gross income can go directly back into the economy. Remember, no credit, no personal financing, just cash. This hit on all services would be devastating as most services would collapse. No cable, cell-phone, restaurants, etc… .
  • Further rate of inflation. As we are heading into further market corrections, so too does the cost of most commodities. We all know that world food prices are going up. This will have a major impact on national economic growth factors in the months to come. Bread goes up, less disposable income. You have to eat, right?
  • With a upward rate of inflation, comes spiralling inflation, which I argue to be a compound increases as everyone adjusts their costs to go in-line, or match, with what the markets around them are. Take fuel. As fuel prices go up, so too does the cost of living, but all other services that use fuel too go along with it.

As with the experiences in the early 1980s, those who could not survive the double digit prime interest rates were doomed. Also though the prime is at record lows, and they can still move upwards, and this time the increases will have a more dramatic effect than back then. Household debt is perhaps the biggest factor as most Canadians seems to have spent there way through the last session.  If a household is carrying more than twice their annual income in debt, then my estimate would say that that it would take  approximately seven years to pay that off, so this would mean a minimum of seven years for the national economy to fully recover using this strict finical management. Of course, this is not going to happen, so I predict that the time could be as long a Fifteen to Twenty years.

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