# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Disposable Income

Updated August 22, 2020

What Is Disposable Income?

Disposable income, also known as net pay, refers to the income that’s left for personal spending after direct taxes, such as federal and state income taxes, have been accounted for. It is a key concept in personal budgeting and economic policy.

How Is Disposable Income Calculated?

Disposable income is calculated by subtracting income and  payroll taxes from gross pay; the remainder is disposable income. 

Disposable Income Formula​    

Personal Income − Personal Income Taxes = Disposable Income

Disposable Income Example

Using the formula above, let’s say you earn $50,000 a year. In that bracket, about 20% of total income will go toward a combination of federal, state and local income taxes. According to this example, that means $10,000 is taken in income taxes. Subtracting $10,000 from $50,000 leaves you with $40,000 in disposable income.

That $40,000 is available to spend on housing, transportation, food, health care, and other necessities. Once all of those essential costs are covered, you’re left with your discretionary income.

Why Is Disposable Income Important?

Understanding and calculating disposable income is a key step in preparing a personal budget since it is the amount you actually have to make spending or saving decisions. Disposable income is also an important concept for those studying and planning government economic policies. 

The Bureau of Economic Analysis (BEA) reports disposable income as one of three main measures of income. It’s also part of the government’s calculations of consumer spending and figures in the consumer price index. Disposable income is also used to help set Social Security benefits, as well as government transfers such as unemployment and disability.
 

Ask an Expert about Disposable Income
At InvestingAnswers, all of our content is verified for accuracy by Rachel Siegel, CFA and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Disposable Income.
Be the first to ask a question

If you have a question about Disposable Income, then please ask Rachel.

Ask a question
Rachel Siegel, CFA
CFA logo

CFA Charterholder

Chartered Financial Analyst

Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.  Her prestigious background includes over 10 years of experience in creating professional financial certification exams and another 20 years of college-level teaching.

If you have a question about Disposable Income, then please ask Rachel.

Ask a question Read more from Rachel

Read this next

Rachel Siegel, CFA - profile
Ask an Expert about Disposable Income

By submitting this form you agree with our Privacy Policy

Share
close
Don't Know a Financial Term?
Search our library of 4,000+ terms