What makes up disposable income

Disposable income can be calculated for a household or for a nation and has important economic significance. Not only is it one of the major determinants of consumer spending, but it is also one of the five determinants of demand. How much disposable income a person or a population of people has can help economists determine how much money they might spend on goods and services or save. The U. However, it does not include realized or unrealized capital gains or losses from investments.

PCE are the value of the goods and services purchased by, or on the behalf of, U. The BEA estimated that U. The BEA estimated U. Those figures were adjusted to exclude inflation. Discretionary income can be spent on restaurant meals, investments, travel, entertainment, and any other non-essential items or services. You can also choose to save a lot or a little of it. The BEA also tracks U. PIP are non-mortgage interest payments made by households. PCTP are non-tax payments made to governments—licenses, permits, and fees.

It can also be described as the percentage of their income they have left after taxes and spending. The rate was Bureau of Economic Analysis. Accessed Oct. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Social Sciences Economics U. Robert Longley. History and Government Expert. Robert Longley is a U. Facebook Facebook. Updated January 03, Key Takeaways: Discretionary Invome Disposable income is the amount of money you have left over from your total annual income after paying federal, state, and local taxes.

Discretionary income is the amount of you have left over after paying all taxes and paying for all necessities of life like housing, healthcare, and clothing.

Discretionary income can either be saved or spent on non-essential things like travel and entertainment. Cite this Article Format. Longley, Robert. Definition and Examples. What Is Disposable Income? What Is Socialism? Do Undocumented Immigrants Pay Taxes? National Debt or Federal Deficit? What's the Difference? A Beginner's Guide to Economic Indicators.

For example, economists use disposable income as a starting point to calculate metrics such as discretionary income , personal savings rates, marginal propensity to consume MPC , and marginal propensity to save MPS.

Here's what these metrics indicate:. Discretionary income is disposable income minus all payments for necessities , including a mortgage or rent payment, health insurance, food, and transportation.

This portion of disposable income can be spent at will. Discretionary income is the first to shrink after a job loss or pay reduction. Businesses that sell discretionary goods, like jewelry or vacation packages tend to suffer the most during recessions. Their sales are watched closely by economists for signs of both recession and recovery. The personal savings rate is the percentage of disposable income that goes into savings for retirement or other goals.

For several months in and , the average personal savings rate dipped into negative territory for the first time since This means that Americans spent all of their disposable income every month and still had to tap into savings or debt to make up the difference. Marginal propensity to consume is the percentage of each additional dollar of disposable income that is spent immediately, while marginal propensity to save is the percentage that is saved.

The federal government uses a slightly different method to calculate disposable income for wage garnishment purposes. This is the seizure of a portion of a wage earner's paycheck before it is paid every payday until the amount due for back taxes or overdue child support is repaid. For this purpose, the government uses disposable income as a starting point to determine how much of each paycheck to seize.

The amount paid into a gross income retirement plan also is deducted from disposable income in this calculation. To calculate your disposable income, you will first need to know what your gross income is. For an individual, gross income is your total pay, which is the amount of money you've earned before taxes and other items are deducted. From your gross income, subtract the income taxes you owe. The amount left represents your disposable income.

The gap between the richest and the poorest in the U. The proportion of saved disposable income is known as the average propensity to save APS. This macroeconomic term is also called the savings ratio and refers to the proportion of a population's income that is saved as opposed to being spent on services or goods.

To calculate the APS ratio, divide total savings by disposable after-tax income. Bureau of Economic Analysis. Federal Reserve Bank of St.

Louis Review. Accessed July 30, Department of Labor. Louis Fed.