What is ‘Disposable Income’
Disposable income, also known as disposable personal income (DPI), is the amount of money that households have available for spending and saving after income taxes have been accounted for. Disposable personal income is often monitored as one of the many key economic indicators used to gauge the overall state of the economy.
BREAKING DOWN ‘Disposable Income’
For example, consider a family with a household income of $100,000, and the family has an effective income tax rate of 25%. This household’s disposable income would then be $75,000 ($100,000 – $25,000). Economists use DPI as a starting point to gauge households’ rates of savings and spending.
Statistical Uses of Disposable Income
Many useful statistical measures and economic indicators derive from disposable income. For example, economists use disposable income as a starting point to calculate metrics such as discretionary income, personal savings rates, marginal propensity to consume and marginal propensity to save.
Disposable income minus all payments for necessities, such as mortgage, health insurance, food and transportation, equals discretionary income. This portion of disposable income can be spent on what the income earner chooses or, alternatively, it can be saved. The personal savings rate is the percentage of disposable income that goes into savings for retirement or use at a later date. Marginal propensity to consume represents the percentage of each additional dollar of disposable income that gets spent, while marginal propensity to save denotes the percentage that gets saved.
For several months in 2005, the average personal savings rate dipped into negative territory for the first time since 1933. This means that in 2005, Americans were spending all of their disposable income each month and then tapping into debt for further spending.
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