Disposable income is the money you still have after paying taxes on your earnings. It is calculated using the straightforward formula shown below: Personal income minus current personal taxes equals disposable income.
After paying all applicable taxes to the federal, state, and local governments as well as any other necessary contributions, your remaining income is referred to as your disposable income.
Personal income less personal current taxes can be used to calculate disposable income.
Economists keep a careful eye on a nation’s people’ disposable income levels as well as the level of consumer expenditure, which is somewhat influenced by disposable income.
Disposable income is defined as total income less all required costs, such as shelter and food.
Examples of Disposable Income and Their Definition
Your disposable income, also known as disposable personal income, is the money from your salary or wages that is still in your account after paying all applicable federal, state, and local taxes (DPI). These three types of taxes include payroll deductions for Social Security, Medicare, and unemployment insurance as well as income and property taxes.
Any mandatory government withholdings for retirement savings, such as federal government employee contributions to the Basic Benefit Plan, are deducted from personal income in order to determine disposable income, as are the costs of licenses, permits, and other mandatory fees you pay to a government agency at any level. Taxes are by far the largest portion of the deduction for the majority of people.
Alternative names: After-tax income, disposable personal income, and disposable earnings
What Happens to Disposable Income?
Calculating disposable income for a household or a country has significant economic implications. It is not just one of the key factors influencing consumer spending, but it is also one of the five factors influencing demand. Economists can estimate how much money a person or population might spend on goods and services or save based on how much disposable income they have.
Data on monthly changes in personal income, DPI, and consumer spending—more technically known as “personal consumption expenditures”—are made available by the U.S. Bureau of Economic Analysis (BEA) (PCE).
The income that all Americans get personally or on their behalf from all domestic and international sources is referred to as U.S. personal income. (But it excludes realized or unrealized gains or losses on investment in capital.) U.S. PCE, which is tracked as a key indicator of the health of the economy, represents the value of the products and services purchased by or on behalf of U.S. citizens.
DPI and PCE were significantly impacted by the COVID-19 pandemic in 2020 and 2021, although these numbers started to increase in late 2021. According to BEA projections, personal income in the United States climbed by $93.4 billion in October 2021 compared to the previous month, while DPI increased by $214.3 billion.
Comparing discretionary income to disposable income
It’s important to distinguish between disposable income and discretionary income, which is the amount of disposable income that remains after covering expenses for things like housing (in the form of a rent or mortgage payment), healthcare, food, power, and transportation.
The utilization of each type of income can be used to differentiate between disposable and discretionary money. Discretionary income may be more beneficial on a micro level, such as when setting a budget, or for other reasons related to personal finance, whereas economists consider disposable income crucial for monitoring macro trends.
Spending discretionary income on dining out, investing, travel, entertainment, and any other luxuries is permitted. After covering your critical costs, you may consider it your “fun money” to spend on things you don’t actually need. Additionally, you have the option of saving some or a lot of it.