The money that remains of an individual’s salary after paying all local, state, and federal taxes
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What is Disposable Income?
Disposable Income is the money that is available from an individual’s salary after he/she pays local, state, and federal taxes. It is also known as disposable personal income or net pay. The disposable income of a household includes earnings plus unemployment benefits and capital income.
Disposable income is one of the main parameters in determining consumer spending. It is also one of the most important factors for determining demand. Disposable income indicates the amount of goods and services that can be purchased at different prices over a particular period. It implies that the amount of disposable income available to someone can help determine the amount of money spent on goods and services.
Summary
- Disposable income is the portion of income available to an income earner after all income taxes are deducted.
- It is used by analysts to measure consumer spending, payment ability, probable future savings, and the overall health of a nation’s economy.
- Disposable income can be used to determine the financial reserves of households and the money available to be spent on goods and services.
Formula for Disposable Income
Disposable Income = Personal Income – Personal Income Taxes
Suppose a family’s aggregate income is $150,000, along with an effective tax rate of 27%. The disposable income for the family will be $109,500 [$150,000 – (27% x $150,000)].
Significance of Disposable Income
Disposable income is used by analysts to measure the state of an economy. It can also be used to measure the households’ financial reserves. It helps economists to measure the savings and spending rates of the households. Disposable income is used to derive several economic indicators and measures such as discretionary income and personal saving rate.
When the disposable income has accounted for payments of all necessities – such as food, health insurance, and mortgage – the result is the discretionary income. The discretionary income is a part of disposable income after payments of necessities have been made. Income earners can save or spend the discretionary income as he/she wishes.
In the event of financial pressure, such as economic downturn and job loss, discretionary income will drastically reduce. A percentage of disposable income – the personal savings rate – goes into savings for later use or retirement.
The federal government uses the disposable income to determine the amount of money to be withheld from the wages of an individual for payments to third parties or back tax payments. The disposable income is used to determine the amount of money to be withheld from the paychecks of income earners.
The portion of disposable income that could be withheld can be a maximum of 25% of an individual’s disposable income or the amount that results in an individual’s weekly income to be greater than 30 times the minimum federal income, whichever is lower. While calculating the disposable income, the federal government also deducts the premiums of health insurance and contributions from involuntary retirement plans from the gross income.
In the above example, assume the family needs to pay a yearly premium of $15,000 for health insurance and $7,500 in retirement contributions. The disposable income for purposes of withholding income will reduce from $109,500 to $87,000 ($109,500 – $15,000 – $7,500 = $87,000).
Per Capita Disposable Income
Disposable income is a useful measure of the health of an economy. Hence, it is one of the important metrics examined by government officials and analysts. The disposable income data helps to analyze the consumer’s ability to make purchases, make payments, and accumulate savings for the future. The Organization for Economic Cooperation and Development (OECD) collates the financial data of various countries, tracks, and reports the per capita disposable income for households.
The aggregate personal income for the United States was about $15 trillion in 2019. The United States reported the highest per capita disposable income, with each American generating $45,579 of disposable income. Furthermore, Luxembourg, Australia, Germany, and Switzerland were among the countries with the ten-largest per capita disposable incomes.
Additional Resources
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FAQs
Disposable income is the amount of money that a person or family has left after paying their taxes. It is the portion of income that can be spent on necessities, such as food and rent. People can also use disposable income to pay for discretionary items, leisure activities, and investments.
How do you solve disposable income? ›
Calculating disposable income is fairly simple. Subtract your tax liability from your income (e.g., wages, commissions, etc.) to find your DPI. If your DPI is less than what you need for essential items, such as rent and food, you may need to make lifestyle changes or take a bigger cut of your business's profits.
What should my disposable income be? ›
Ultimately, your disposable income is the money you are supposed to live on from month to month. It is the amount of money upon which you base your budget for each month and annual spending. You can use your disposable income to determine how much you can afford to spend on necessities.
How much disposable income is normal? ›
According to the UK Government, the average weekly disposable income in the UK was £539 in 2021. This means that the average disposable income per month was £2,156, and around £28,100 per year. This figure is the median household income before housing cost has been deducted.
Is a 401k considered disposable income? ›
It's the amount available to spend on living costs, savings, and discretionary purchases. Our attorney told Mark that 401k contributions are generally not considered disposable income.
What is excluded from disposable income? ›
Deduct the amounts that are required by law, such as IRS income taxes, FICA, Social Security and L&I. If union membership or pension contribution is mandatory, deduct union dues and/or pension amounts. Do not deduct such amounts as car Payments, non-mandatory union dues, or voluntary savings deposits.
What is the disposable income rule? ›
Disposable income is any income or revenue an individual or business receives that is left over after paying necessary expenses. For example, if you make $1,000 a week with $600 weekly expenses, you would have $400 weekly disposable income.
What is a disposable income calculator? ›
The disposable income calculator tells you how much of your income you have left after familial (or individual) obligations to the government.
How to calculate disposable earnings? ›
Gross income - taxes withheld = disposable earnings For example, if your employee earns $2,000 gross income and $500 is withheld for taxes, the formula would read: $2,000- $500 = $1,500 disposable earnings.
Is saving $1500 a month good? ›
Saving $1,500 per month may be a good amount if it's feasible. In general, save as much as you can to reach your goals, whether that's $50 or $1,500. You could speak with a certified financial planner to help develop a plan for your finances if you aren't sure how much money to save regularly.
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
What is the 60 20 20 rule? ›
If you have a large amount of debt that you need to pay off, you can modify your percentage-based budget and follow the 60/20/20 rule. Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings.
What salary is middle-class? ›
According to the study, a middle-class income averages between $52,000 and $155,000 in a large U.S. city. The median household income across all 345 cities is $77,345, making middle-class income limits fall between $51,558 and $154,590.
Is 100k a year middle-class? ›
A Middle-Class Income Is $50,000 to $150,000
“The definition of middle income ranges from earning two-thirds to double the median household income,” said CFP and The Ways To Wealth founder R.J. Weiss, who cited the Pew Research Center's widely accepted definition of the term.
What age group has the most disposable income? ›
Not only are Baby Boomers the wealthiest generation, holding 70% of the disposable income in the U.S. and spending over $548 billion a year, but they also they spend more than any other generation, across all categories. This includes spending the most per transaction.
What is leftover money called? ›
Discretionary income is the money you have leftover after paying for necessities like housing, groceries, everyday expenses and necessary bills. It's often used to calculate repayment of federal student loans, though not everyone makes enough money to have discretionary income.
What is the formula for personal income? ›
2) The second approach can be derived by adjusting the national income with the income received and earned and income not earned but received. PI = NI + Income Earned but not Received + Income Received but not Earned.
What is the expression for disposable income? ›
Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income.
What is disposable personal income equal to? ›
What is Disposable Personal Income? After-tax income. The amount that U.S. residents have left to spend or save after paying taxes is important not just to individuals but to the whole economy. The formula is simple: personal income minus personal current taxes.
