What Is Disposable Income?

Disposable Income Explained

Image shows a table explaining the difference between disposable income and discretionary income. Text reads: "Disposable income vs. discretionary income. Disposable Income: disposable income = money left over from salary after all taxes paid; one of five determinants of demand; dictates consumer spending. Discretionary income: what's leftover after paying necessities out of your disposable income, like rent, mortgage payments, healthcare, and transporation; can be spent on non-essentials, such as dining out, investing, and travel; essentially, considered your 'fun money'"

Image by Julie Bang © The Balance 2020

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.

Definition and Examples of 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 COVID-19 pandemic of 2020 and 2021 had a major negative effect on DPI and PCE, but these figures began to rise in late 2021. The BEA estimates that U.S. personal income increased by $93.4 billion in October 2021 from the month prior, and that DPI increased by $214.3 billion.

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.

One way to characterize the difference between disposable income and discretionary income is their use. Disposable income is important to economists to track macro trends, while discretionary income may be more useful on a micro level, such as when creating a budget, or for other personal finance reasons.

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.

Key Takeaways

  • 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.