Takeaways
- Disposable income is your after-tax income minus mandatory charges.
- Disposable income marks how much money you have to pay for necessities.
- Budgets allocate monthly spending based on your disposable income.
- Disposable income funds expenses like mortgage payments, groceries, and rent.
- Higher disposable incomes can accelerate paying off debt, saving for retirement, investing in real estate, and gaining access to high-end credit products.
What Is Disposable Income?
Disposable income is the amount of income after paying all current federal, state, and local taxes and other mandatory charges like Social Security and Medicare payments.[1] It is the money you can use to pay for ordinary expenses, necessities, or save.
Personal disposable income is a highly monitored economic marker for economists because it indicates the economy's strength. The higher the personal disposable income, the more households and individuals tend to spend on items besides core living expenses.
With more disposable income, you might buy a new car or purchase your first home. Alternatively, you can grow your excess cash in a savings account or buy investments.
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Disposable Income Calculation
There are several ways to calculate disposable income. Below is the formula to calculate disposable income:
Disposable Income = Total Income – Taxes
- Total income includes all sources of income, known as gross income. Check our gross income calculator if you don’t know your gross income.
- Taxes consist of all federal income taxes, state income taxes (unless you live in one of the states with no income taxes), and local taxes, like property taxes. Additionally, you will need to include capital gains taxes.
How Disposable Income Works
Disposable income is the amount of money you have left after paying taxes. It can be spent on living expenses and necessities, personal spending, and other productive areas like saving, investing, and paying off debt. Check out our plug-and-play 50/30/20 Budget Calculator for monthly recommendations on how much to spend in each category.
Economists monitor disposable income closely because it shows how loose or tight consumer spending is likely to be. Households with more disposable income are more likely to splurge on luxury goods or vacations. This, in turn, is good for the economy's overall health, and companies benefit from increased spending.
Disposable income is the starting number in calculating critical economic indicators like:
- Discretionary income: Your discretionary income is your disposable income minus your essential living expenses, like rent, groceries, transportation, and healthcare.
- Personal savings rate: Your personal savings rate is the percentage of disposable income you allocate to saving, investing, and retirement.
- Marginal propensity to save: Economists use this term to describe the percentage of each additional dollar earned that is saved.
- Marginal propensity to consume: Personal finance experts use this term to describe the percentage of each additional dollar you earn that will be spent.
These barometers of financial health can foreshadow whether an economy is moving toward a recession or expansion.
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Who Tracks Personal Disposable Income
Government agencies and financial institutions actively monitor the U.S. economy's and consumers' health. Here are several that keep a pulse on personal disposable income:
- Federal Reserve closely monitors disposable income because it is considered a key indicator of consumer spending and household economic well-being. This metric helps inform monetary policy and the federal funds rate. The Federal Reserve of St. Louis tracks monthly real disposable personal income through its FRED system, which is short for Federal Reserve Economic Data.[2]
- Bureau of Economic Analysis (BEA) cares about how U.S. workers and businesses are faring. The BEA tracks personal disposable income in its monthly Personal Income and Outlays report.[3]
- Department of Agriculture (USDA) observes the health of the U.S. consumer and the portion of disposable income spent on food. The USDA's Economic Research Service's Food Expenditure Series checks spending on food both at home and dining out. For example, in 2023, the average U.S. consumer spent 11.2% of disposable income on food.[4]
- Banks and Credit Unions survey their account holders' and potential customers' disposable income and savings rates. They can offer promotional deals on high-interest savings accounts, certificates of deposits, or credit products to economically healthy households.
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Why Disposable Income Matters
Disposable income helps individuals and households manage their personal finances. It affects access to a wide range of credit and savings products. Here’s what a high disposable income could give you:
- Credit card rewards programs: If you are applying for a credit card, you will get approved for the best rewards cards if you have a low debt-to-income ratio and are a high earner.
- Low-cost personal loans: Larger personal loans with lower interest rates are approved for households with more disposable income. Lenders know you can repay larger loans with a higher personal net income.
- Better mortgage rates: Lenders reward applicants with consistent, high-quality income streams with the lowest interest rate mortgages. This is true whether you need a jumbo loan or a conventional loan.
- Investing services: Once the best online brokerage accounts recognize that you have crossed the net worth chasm, they offer premium investment services. They roll out the red carpet and propose lower fees and investment recommendations.
- Personalized financial planning: Banks and Robo-advisors will proactively invite you to their customized suite of financial planning services if you have a high disposable income. You can secure an invitation once your savings or investing balance is high.
Smart Summary
Disposable income is the amount of money you have left after paying taxes. It is the starting point from which you can spend on essential items like rent, transportation, and groceries. Once your essentials are paid, disposable income, by definition, morphs into discretionary income—economists and financial media track disposable income to gauge the economy's performance.
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(1) Bureau of Economic Analysis. Disposable Personal Income. Last Accessed April 3, 2025.
(2) Federal Reserve Bank of St. Louis. Real Disposable Income. Last Accessed April 3, 2025.
(3) Bureau of Economic Analysis. Income & Savings. Last Accessed April 3, 2025.
(4) U.S. Department of Agriculture. U.S. consumers spent 11.2 percent of disposable personal income on food in 2023. Last Accessed April 3, 2025.
