What Is Disposable Income?
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 necessities are covered.
- Economists monitor these numbers at a macro level to see how consumers save, spend, and borrow.
- Shelter, food, and debts are usually paid using disposable income.
- The government uses disposable income when deciding how much of a paycheck to seize for money owed in back taxes or child support.
Understanding Disposable Income
Disposable income is the net income received after taxes have been taken out.
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).
Discretionary income is equal to 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.
Personal Savings Rate
The personal savings rate is the percentage of disposable income that goes into savings for retirement or other goals. 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.
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 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.
How Do You Calculate Disposable Income?
To calculate your disposable income, you will first need to know what your gross income is. For an individual, gross income is your total pay, which is the amount of money you've earned before taxes and other items are deducted. From your gross income, subtract the income taxes you owe. The amount left represents your disposable income.
Is Disposable Income Net or Gross?
Disposable income is a net amount.
Is Disposable Income Taxable?
No, disposable income is net of taxes.
What Is the Average Disposable Income in the U.S.?
For 2021, the disposable income per capita in the United States was $55,710. The gap between the richest and the poorest in the U.S., however, is considerable. The Organisation for Economic Co-operation and Development (OECD) reports that the top 20% of the U.S. population earns almost nine times as much as the bottom 20%.
What Is the Proportion of Saved Disposable Income Called?
The proportion of saved disposable income is known as the average propensity to save (APS). This macroeconomic term is also called the savings ratio and refers to the proportion of a population's income that is saved as opposed to being spent on services or goods. To calculate the APS ratio, divide total savings by disposable (after-tax) income.
The Bottom Line
Disposable income is what is left over after taxes, and is what households used for consumption of needs and wants. Things like rent, bills, food shopping, gasoline, and so on come out of disposable income. What is left over for savings or wants (vs. needs) is known as discretionary income.
To increase disposable income, one can earn more and/or reduce their tax liability. In aggregate, when disposable income increases, households have more money to either save or spend, which naturally leads to a growth in consumption. Consumer spending is one of the most important determinants of demand; it creates the demand that keeps companies profitable and hiring new workers.