Disposable Income

Published Feb 3, 2023

Definition of Disposable Income

Disposable income is the amount of money that an individual or household has available to spend or save after taxes, and other deductions have been taken out. That means it is the amount of money that is left after all necessary expenses have been paid.

Example

To illustrate this, let’s look at the example of John, a single father of two. John works part-time as a software engineer and earns a salary of USD 60,000 per year. Now, let’s assume John has to pay USD 10,000 in rent, USD 2,000 in utilities, and USD 4,000 in childcare. That means his total expenses add up to USD 16,000. That leaves him with USD 34,000 in disposable income. Or in other words, he has USD 34,000 available to spend or save after all necessary expenses have been paid.

Why Disposable Income Matters

Disposable income is an important economic indicator because it provides insight into the spending and saving habits of individuals and households. It is also closely related to consumer spending, which is one of the most important drivers of economic growth.

That means changes in disposable income can have a significant impact on the overall economy. If disposable income increases, people are likely to spend more, which can lead to an increase in economic growth. On the other hand, if disposable income decreases, people are likely to save more, which can lead to a decrease in economic growth.