Disposable Income: An Overview
Disposable income, also known as disposable personal income (DPI), is the amount of money that an individual or household has to spend or save after income taxes have been deducted.
At the macro level, disposable personal income is closely monitored as one of the key economic indicators used to gauge the overall state of the economy.
- Disposable income is net income. It's the amount left over after taxes.
- Discretionary income is the amount of net income remaining after all basic necessities are covered.
- Economists monitor these numbers at a macro level to see how consumers are saving, spending, and borrowing.
Understanding Disposable Income
A number of statistical measures and economic indicators derive from disposable income. For example, economists use disposable income as a starting point to calculate metrics such as discretionary income, personal savings rates, marginal propensity to consume (MPC), and marginal propensity to save (MPS). Here's what these metrics indicate:
- Discretionary income is disposable income minus all payments for necessities including a mortgage or rent payment, health insurance, food, and transportation. This portion of disposable income can be spent at will. Discretionary income is the first to shrink after a job loss or pay reduction. Businesses that sell discretionary goods, like jewelry or vacation packages, tend to suffer the most during recessions. Their sales are watched closely by economists for signs of both recession and recovery.
- The personal savings rate is the percentage of disposable income that goes into savings for retirement or any other goal. For several months in 2005 and 2006, the average personal savings rate dipped into negative territory for the first time since 1933. This means that Americans spent all of their disposable income every month and still had to tap into savings or debt to make up the difference.
- Marginal propensity to consume is the percentage of each additional dollar of disposable income that is spent immediately, while marginal propensity to save is the percentage that is saved.
Disposable Income for Wage Garnishment
The federal government uses a slightly different method to calculate disposable income for wage garnishment purposes. This is the seizure of a portion of a wage earner's paycheck before it is paid on every payday until the amount due for back taxes or overdue child support is repaid.
For this purpose, the government uses disposable income as a starting point to determine how much of each paycheck to seize. The amount garnished may not exceed 25% of a person's disposable income or the amount by which a person's weekly income exceeds 30 times the federal minimum wage, whichever is less. The amount paid into a gross income retirement plan also is deducted from disposable income in this calculation.