What is Disposable Income?

Published by Thomas Herold in Economics

The term 'Disposable Income' is included in the Economics edition of the Herold Financial Dictionary. Get yourself a copy now on Amazon - available as Kindle or Paperback.

Disposable income proves to be the remaining income after an individual has met all of his or her income tax obligations. It is utilized as a means of ascertaining the health of an entire society, as well as a person’s general economic condition. Disposable income also turns out to be among the main measurements for determining personal wealth.

Although they are sometimes used interchangeably, disposable income should not be confused with discretionary income. Discretionary income is simply any income that remains following paying the taxes and other customary living expenses. This means that the value for disposable income is a greater amount than discretionary income proves to be in practically every case. Still disposable income does not really deal with the day to day costs of living that people encounter in their normal lives.

For you as an American, disposable income typically proves to be anywhere from ten to fifteen percent of the personal income of an individual. All of the rest of the money goes into one of a number of different taxes. Naturally, this would be individually determined as a result of the amount of income that you have, the withholding allowances that you enjoy, and the state in which you reside. Similarly, for other countries, disposable income can be figured more or less by examining the typical tax rates.

Disposable income commonly decreases in difficult economic times, such as recessions and depressions. This does not happen because of an increase in taxes. Instead, it is more a factor of the likelihood of it falling in challenging economic times as companies cut back on employee payrolls. Because of this, lower disposable income will mean that people have more difficult times in fulfilling their present obligations. This will make them far less likely to take on new financial responsibilities.

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When people do not make enough money to be taxed, then their disposable income may actually prove to be about the same as their total income is. This is similarly the case in nations that do not charge their citizens personal income taxes. In such cases, gross income and disposable income are identical.

Besides being used for spending on needs and expenses, it can also be saved and invested. Through wisely purchasing cash flow investments with disposable income, the resulting disposable income in the future can actually be consistently higher as regular investment income comes in to the person’s account. Disposable income used for capital gains investments will commonly lead to one time gains on sales, which will only temporarily increase disposable income for one time.

The term 'Disposable Income' is included in the Economics edition of the Herold Financial Dictionary. Available now on Amazon in Kindle and Paperback.