The costs of licenses, permits, and other mandatory fees you pay to a government agency at any level are also subtracted from personal income to calculate disposable income, as are any withholdings for retirement savings that are mandated by a government, such as federal government employee contributions to the Basic Benefit Plan. For most people, taxes far and away represent the greatest component of the deducted amount. Alternate names: Disposable personal income, disposable earnings, after-tax income
How Does Disposable Income Work?
Disposable income can be calculated for a household or for a nation and has important economic significance. Not only is it one of the major determinants of consumer spending, but it is also one of the five determinants of demand. How much disposable income a person or a population of people has can help economists determine how much money they might spend on goods and services or save. U.S. personal income is the income received by, or on behalf of, all U.S. residents from all sources, both domestic and global. (However, it does not include realized or unrealized capital gains or losses from investments.) U.S. PCE are the value of the goods and services purchased by, or on the behalf of, U.S. residents and are tracked as an important measure of the economy’s strength. The COVID-19 pandemic of 2020 and 2021 had a major negative effect on DPI and PCE, but these figures began to rise in late 2021. The BEA estimates that U.S. personal income increased by $93.4 billion in October 2021 from the month prior, and that DPI increased by $214.3 billion.
Disposable Income vs. Discretionary Income
Disposable income should not to be confused with discretionary income, which is what is left of your disposable income after you’ve paid for necessities like housing (in the form of rent or a mortgage payment), healthcare, food, electricity, and transportation. Discretionary income can be spent on restaurant meals, investments, travel, entertainment, and any other non-essential items or services. You might look at it as your “fun money” to spend on things you don’t really need, after your essential expenses are covered. You can also choose to save a lot or a little of it.
