Disposable Income

Key takeaways

• Disposable income is the amount of money left to spend or save after mandatory taxes and deductions.
• Discretionary income is disposable income minus necessary living expenses.
• Economists track disposable income to gauge consumer spending, saving, and overall economic demand.

What is disposable income?

Disposable income (also called disposable personal income or net income) is the portion of an individual’s or household’s gross income remaining after federal, state, and local taxes and other mandatory charges are deducted. It funds necessities (food, housing, utilities) and nonessentials (leisure, luxury, investments).

Formula

Disposable income = Total (gross) income − Taxes − Mandatory deductions

Mandatory deductions include income taxes and other compulsory payroll items; for some legal calculations, certain pre-tax retirement contributions may also be treated as deductions.

How to calculate yours (simple steps)

1. Determine gross income (total pay before deductions).
2. Subtract income taxes and other mandatory deductions.
3. The remainder is your disposable income.
4. To find discretionary income, subtract necessary expenses (rent/mortgage, food, insurance, transportation) from disposable income.

Uses and related measures

• Discretionary income: What remains after necessities — available for wants, luxuries, travel, and nonessential purchases. This typically contracts first during income loss or recession.
• Personal savings rate: The share of disposable income set aside for savings or investments.
• Marginal propensity to consume (MPC): The fraction of each additional dollar of disposable income that is spent.
• Marginal propensity to save (MPS): The fraction of each additional dollar that is saved.

Special considerations

• Wage garnishment: For enforcing debts (child support, back taxes), the government calculates a person’s disposable income to determine garnishment limits. Federal rules generally cap garnishment at 25% of disposable income or the amount by which weekly earnings exceed 30 times the federal minimum wage, whichever is less.
• Retirement plan contributions: Certain pre-tax retirement contributions can reduce disposable income for specific legal calculations.

Economic importance

Disposable income drives consumer spending, which is a primary component of aggregate demand and economic growth. Changes in disposable income influence:
* Business revenues and hiring
* Household saving and investment behavior
* Demand for goods and services across industries (discretionary sectors are especially sensitive)
* Government tax receipts (higher disposable incomes generally reflect higher taxable capacity)

Interpreting changes

Rising disposable income usually signals more room for consumption and saving, supporting economic expansion. Falling disposable income suggests reduced purchasing power and may presage declines in consumer spending. Policymakers and analysts monitor these trends when setting fiscal and monetary policy.

Quick FAQs

Q: Is disposable income net or gross?
A: Net — it is after-tax income.

Q: Is disposable income taxable?
A: No. By definition, it is income remaining after taxes have been deducted.

Q: What is the average disposable income in the U.S.?
A: Disposable income per capita varies by year; for reference, it was reported at $61,296 per capita in 2023.

Bottom line

Disposable income is a core measure of household financial capacity. It determines how much people can cover essentials, save, invest, and spend on discretionary items. Tracking disposable and discretionary income helps individuals manage budgets and helps economists and policymakers assess the health of the broader economy.