Disposable income is the money you have left from your income after you pay taxes. It's calculated using the following simple formula: disposable income = personal income – personal current taxes.
Learn more about disposable income, its importance as an economic indicator, and how it differs from discretionary income.
What Is Disposable Income?
The money you have left over from your salary or wages after you’ve paid federal, state, and local taxes is your disposable income or disposable personal income (DPI). Those three levels of taxes consist of income and property taxes and paycheck deductions for Social Security, Medicare, and unemployment insurance.
The costs of licenses, permits, and other mandatory fees you pay to a government agency at any level are also subtracted from personal income to calculate disposable income, as are any withholdings for retirement savings that are mandated by a government, such as federal government employee contributions to the Basic Benefit Plan. For most people, taxes far and away represent the greatest component of the deducted amount.
Alternate names: Disposable personal income, disposable earnings, after-tax income
How Does Disposable Income Work?
Disposable income can be calculated for a household or for a nation and has important economic significance. Not only is it one of the major determinants of consumer spending, but it is also one of the five determinants of demand. How much disposable income a person or a population of people has can help economists determine how much money they might spend on goods and services or save.
The U.S. Bureau of Economic Analysis (BEA) releases data on the monthly changes in personal income, DPI, and consumer spending, which is known more formally as personal consumption expenditures (PCE).
U.S. personal income is the income received by, or on behalf of, all U.S. residents from all sources, both domestic and global. (However, it does not include realized or unrealized capital gains or losses from investments.) U.S. PCE are the value of the goods and services purchased by, or on the behalf of, U.S. residents and are tracked as an important measure of the economy's strength.
The BEA estimated that U.S. personal income increased by $170.3 billion, or 0.9%, and that U.S. DPI increased by $150.3 billion, or 0.9%, in September 2020 from the prior month. The BEA estimated U.S. PCE increased by $201.4 billion, or 1.4%, during the same time period.
Real DPI and real PCE increased an estimated 0.7% and 1.2%, respectively, in September 2020 from August 2020. Those figures were adjusted to exclude inflation.
Disposable Income vs. Discretionary Income
Disposable income should not to be confused with discretionary income, which is what is left of your disposable income after you’ve paid for necessities like housing (in the form of rent or a mortgage payment), health care, food, electricity, and transportation.
Discretionary income can be spent on restaurant meals, investments, travel, entertainment, and any other non-essential items or services. You might look at it as your fun money to spend on things you don’t really need, after your essential expenses are covered. You can also choose to save a lot or a little of it.
Related Economic Measures
The BEA also tracks U.S. personal outlays, which are the sum of all PCE, personal interest payments (PIP), and personal current transfer payments (PCTP). PIP are non-mortgage interest payments made by households. PCTP are non-tax payments made to governments—licenses, permits, and fees.
Personal outlays increased by $217.5 billion in September 2020 from the month before.
The U.S. personal saving rate is the percentage of their DPI that U.S. residents don't spend. It can also be described as the percentage of their income they have left after taxes and spending.
The rate was 14.3% in September 2020, down from 14.8% in August.
- Disposable income is the money you have left from your income after you pay federal, state, and local taxes and any other mandatory payments to a government.
- Disposable income can be calculated as personal income minus personal current taxes.
- The amount of disposable income for the residents of a country is closely followed by economists, as is the level of consumer spending, which depends in part on disposable income.
- Discretionary income is disposable income minus the cost of all necessary expenses, including food and housing.