What Is Disposable Income?
What is disposable income? What is its economic relevance? How does it differ from discretionary income?
In a nutshell, disposable income is the remaining amount in your income after you paid your taxes. Calculating it is pretty simple. You just have to use this formula:
Disposable income = Personal current taxes – Personal income
Read on so that you can learn more about this concept and its role as a financial indicator.
Disposable Income: What Is It?
Just as what we stated earlier, disposable income is the money left to your income or salary after you paid for local, state, and federal taxes. Disposable income is also known as disposable personal income (DPI). Meanwhile, those taxes mentioned above include the following: property tax, deductions for Medicare and Social Security, unemployment insurance, and income tax.
The expense of maintaining permits, licenses, and other mandatory fees you need to pay for particular government agencies can also be subtracted to your personal income. The resulting amount still qualifies as disposable income. The same is true with the amount deducted in your income for your retirement savings, such as the employee contributions that go to the Basic Benefit Plan. For many people, taxes are the most significant chunk of deductions in their salaries and wages.
How Does Disposable Income Work?
Disposable income can be calculated collectively (for an entire country or for a household). Furthermore, it has crucial economic importance. It is a determinant that helps agencies track consumer spending. Aside from that, it also forms part of the five determinants of demand. Disposable income enables economists to see the money being used by a population or individual on acquiring goods and services.
The US Bureau of Economic Analysis (BEA) has regular monthly releases when it comes to the changes in personal income, disposable income, and consumer spending. The latter is known as the personal consumption expenditure (PCE).
The United States personal income can be defined as the income received by all Americans from various sources–both locally and internationally. However, keep in mind that it doesn’t include the unrealized and realized capital gains. Even the losses from investments are not included in this matter. The United States PCE is the overall value of the services and goods bought by, or on behalf of the resident of the United States. It is a way of tracking the strength of the country’s economy.
The agency estimated that the United States personal income has increased by $170.3 billion in September 2020. Meanwhile, the disposable personal income also increased by $150.3 billion in the same month as compared to the previous month. Furthermore, BEA indicated that the United States personal consumption expenditure also increased by 1.4% or $201.4 billion in the same time frame.
Disposable Income And Discretionary Income: What’s Their Difference?
It is essential that you don’t confuse disposable income from discretionary income, and vice versa. Discretionary income is the amount left from your disposable income after you have purchased and paid your essential needs like food, transportation, electricity, housing, and health care. Discretionary income could also be the money that you spend on travels, entertainment, restaurant meals, and various forms of investments. You can see it as the wealth that you can use for things that you need or don’t. It is really up to you. Once you cover your essential expenses, you can choose to spend the money on anything that you want.
Economic Gauges Related To Disposable Income
The BEA is tracking the United States personal outlays, which is the sum of personal current transfer payments, personal interest payments, and personal consumption expenses. Personal interest payments are non-mortgage interest charges that are paid by households. Meanwhile, personal current transfer payments are non-tax payments that you do to acquire government services such as permits and licenses.
It is said that the personal outlays jumped by $217.5 billion in September 2020 from August of the same year.
The United States personal saving rate is the total percentage of the disposable personal income that Americans don’t spend. It is best described as the total money left from their income after they have paid their taxes and did their spending. In September 2020, the US personal saving rate is at 14.3%, which is slightly lower than the 14.8% in August.