What is Disposable Income?

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I hear the question asked quite often: What is disposable income?

Investopedia describes disposable income as,

“The amount of money that households have available for spending and saving after income taxes have been accounted for. Disposable personal income is often monitored as one of the many key economic indicators used to gauge the overall state of the economy.”

This can also be described with the equation below:

Disposable Income = (Personal Income) – (Personal Income Taxes)

And, for those of you that are more visual, take a look at the pie chart below:

Typically, these taxes take about 30% (or more) from our personal income. What we are left with is that light blue section, called our disposable income.

While this is the “professionally accepted” definition, I do not agree with it. In order to survive, we have other expenses that we must endure!

  • Food
  • Shelter
  • Electricity
  • Auto Expenses
  • Clothing

In our society today, these things really aren’t optional! We must pay for these things so that we can survive and grow. So really, our pie chart of disposable income (actually called discretionary income in this case) gets much smaller:

Look at the disposable income now. Even on a strict budget, it’s still only about 15% of your initial income before taxes.

Be Careful With Your Spare Money

Do you see now why you must be so careful with your money? In reality, there is only a very small percentage of your income that you can control. And, if you mismanage even a small amount of it, it may actually be a large percentage of the money that is truly available.

Get out of debt, save your money, and invest it to grow rich!

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

16 Comments

  1. I couldn’t agree more, and I don’t care for that definition either. If only that 70% truly were disposable..
    Angie recently posted..Grocery Coupon Savings Week One

    • Thanks for dropping by Angie! If only we didn’t have those obligatory bills – it would sure be nice to have do whatever we wanted with 70% of our income! Ahhh, but I suppose that would never be. We could get pretty close to 50% if we were without a mortgage or rent payment! 🙂 I look forward to that.

  2. I agree with what you’re saying that we don’t have disposable income before our obligations are met. Personally it annoys me when people say that they have xx amount of money left when in actuallity they aren’t taking into account any bills that they have to pay.

    Great post and the graphs are an amazing visual representation.

    -Ravi G.
    Ravi Gupta recently posted..Ethics and Investing

    • Thanks for the kudos on the graphs! I realize that there are a ton of visual people out there that would benefit from these graphs. I am going to try to incorporate more visuals in the future. 🙂

  3. They say that Shelter cost take up way more then your saying there. Maybe it’s just my disposable income.
    Thanks for the post!

    Mary
    Mary recently posted..Drug Store Deals Week 6

    • I figured shelter to be 25% of your entire income, which really should be a high percentage. Ideally, your shelter should cost you only 25% of your after-tax dollars.

  4. I consider my disposable income to be the money that is left after the necessities are paid. My phone, tv and internet aren’t necessities but my heat, electric and home are.
    You should check out the tv show, “Til Debt Do Us Part”.

    • My cousin was talking about that show! I really should take a peak at it. It sounds really interesting! You think I should write a post about it? 😉

  5. I think you are really looking for discretionary income, which is the amount of an individual’s income that is left for spending, investing or saving after taxes and personal necessities (such as food, shelter, and clothing) have been paid.
    krantcents recently posted..If Not Now- Then When

    • You are 100% correct krantcents! After a while, I didn’t think anyone was going to call me out on it! I understand that the terminology for “disposable income” is necessary, but it’s not truly the money that I have to “dispose of”. There are other expenses that are necessary! I’ll make sure to alter the terminology in my article though. Thanks! 🙂

  6. I need more disposable income! After I decided to make an effort to cut my spending thought process I realized that I don’t want to dispose of my income. All I want to do now is make money so I can save and invest! lol
    LaTisha @FSYAonline recently posted..How to Use Yahoo Finance to Research Stocks

    • Saving and Investing are very wise options LaTisha! It’s the most sure-fire way to get rich and live well in the future.

  7. I have calculated my expenses several times. Where I used to live, we had $200 a month left after we paid for rent (all bills paid), food, medical and gas(for car). This was no where near either one of the charts.

    However, we are moving and our rent should be dropping significantly. Of course, now we will have to pay electricity and internet (a must for my job). Still with a cheaper state that $200 should go up and hopefully, we will have the 15% you talked about.
    Yvette @ Money Ning recently posted..Verizon FiOS Promotion Code Updated February 2013

    • Awesome to hear! Good for you Yvette!


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