Income
Disposable Income: Definition & Example
What Is Disposable Income?
Disposable income is the money a person has available to spend or save after income taxes are paid. It is sometimes confused with discretionary income, which is what remains after necessities too.
What does disposable income mean?
Economists define disposable personal income as income minus personal current taxes. It is a standard measure of how much households can spend and save.
Discretionary income is narrower: disposable income minus essential expenses like housing, food, utilities, and transportation. Federal student loan income-driven repayment plans use their own definitions of discretionary income based on the poverty guideline.
For an individual, take-home pay is a close proxy for disposable income, although it also reflects other payroll deductions such as health insurance and retirement contributions.
Disposable income example
A worker earns $5,000 per month gross and pays $950 in income and payroll taxes. Her disposable income is $4,050. After rent, groceries, utilities, insurance, and transportation totaling $2,900, her discretionary income is $1,150.
Related terms
- Net IncomeNet income is what remains after deductions. For a person, it is take-home pay after taxes and withholdings. For a business, it is profit after all expenses.
- Residual IncomeResidual income is the money left over each month after paying major obligations such as housing, debt payments, taxes, and basic living costs. The term also refers to passive income that keeps arriving after the initial work.
- Gross Monthly IncomeGross monthly income is the total amount a person earns in a month before taxes, retirement contributions, insurance premiums, or other deductions are taken out.
- Cash FlowCash flow is the movement of money into and out of an account, household, business, or property over a period. Positive cash flow means more money came in than went out.
