Understanding Your Spendable Money

Understanding Disposable Income

Disposable income is the money you have left over after paying federal, state, and local taxes, as well as any other mandatory payments to the government. It can be calculated by subtracting personal current taxes from personal income. Economists closely track the amount of disposable income in a country as it influences consumer spending, which is dependent on disposable income levels. Discretionary income, on the other hand, is calculated by subtracting necessary expenses such as food and housing from disposable income.

Definition and Examples of Disposable Income

Your disposable income, also known as disposable personal income (DPI), is what remains from your salary or wages after taxes have been deducted, including income and property taxes, Social Security, Medicare, and unemployment insurance. Additional costs like licenses, permits, and other government fees are also taken into account. The amount withheld for retirement savings, along with taxes, tends to be the most significant deduction for most individuals.

Alternate names for disposable income include disposable personal income, disposable earnings, and after-tax income.

How Does Disposable Income Work?

Disposable income is crucial for understanding consumer spending and is one of the five determinants of demand. It helps economists predict how much individuals or populations might spend on goods and services or save. The U.S. Bureau of Economic Analysis provides data on personal income, DPI, and consumer spending to keep track of economic trends. Recent figures indicate a rise in disposable income and consumer spending after a decline due to the COVID-19 pandemic in 2020 and 2021.

Disposable Income vs. Discretionary Income

It's important not to confuse disposable income with discretionary income. While disposable income is what's left after taxes and necessary expenses, discretionary income is what remains after covering essentials like housing, healthcare, food, electricity, and transportation.

Discretionary income can be spent on non-essential items like dining out, travel, entertainment, or investments. It's often referred to as "fun money" that can be used as desired after essential expenses are taken care of. This distinction between disposable and discretionary income is useful for both macroeconomic trends and personal budgeting or financial planning purposes.