What is Disposable Income?

//What is Disposable Income?
What is Disposable Income? 2017-10-03T05:43:02+00:00

Definition: Disposable income, sometimes called disposable personal income (DPI), is the total earnings a household makes that are available to save or spend after taxes have been paid. In other words, it’s a household’s take home pay after taxes and other employee deductions have been taken out of their paychecks.

What Does Disposable Income Mean?

What is the definition of disposable income? Disposable personal income is the amount of money that you receive in your paycheck. This amount is net of any income taxes, payroll taxes, health care deductions, retirement savings deductions, and other items taken out of your paycheck like cafeteria plans. This is your take home pay that you can choose to spend or save.

Economists look at this metric to gauge the health of an economy. As income levels rise, families are able to afford more goods than the necessities in life and can purchase products like TVs, video games, and snowmobiles. Rising incomes also allows families to save more money in case of a rainy day.

Economists use this metric to track the spending and saving rates of the average household.

Let’s look at an example.

Example

Frederick is looking to invest in a new car in the near future. Before making this investment, Frederick wants to make sure that he is not committing too much of his disposable personal income. In order to do so, Fredrick calculates his DPI using the disposable income formula:

DPI: Annual Income – Taxes and other Payroll Deductions

Frederick’s Annual Income: $53,600

Frederick’s Tax Expenses and Payroll Deductions: $12,864

( $53,600 – $12,864 ) = $40,736.

His take home pay is approximately $40,000. The new car Fred wants has a retail price of $30,000 and a loan payment of $500 per month. This payment is approximately 15 percent of Fred’s DPI. Depending on what other loan payments and living expenses Fred is committed to, this seems like a reasonable purchase if he needs to upgrade his vehicle.

Summary Definition

Define Deposable Income: Disposable income is the net amount income a household earns once taxes have been deducted.