What is Disposable Income

Definition of Disposable Income

Disposable Income is the amount of money left with the person after paying all the direct taxes. It is the actual income that is spent by individuals and families on consumption after paying direct taxes. This is actually referred to as the purchasing power of households. An individual can either consume or save Disposable income. It is generally spent on necessities that are food, clothing, and housing.

Types of Disposable Income

Given below are different types:

1. National

This is nothing but the sum of income of all citizens and institutions of the Nation. It is derived from overall national income, and it measures the cash or Income available with the nation for final consumption and saving. National Disposable Income can be gross or net.

2. Personal

Personal type is referred to that part of the personal income of an individual which is actually available for the use or disposal of a household. So, it is the actual amount available to the individual households and non-corporate businesses after paying all tax obligations of the government.

Disposable Formula

• Disposable Income = Gross Annual Income – Direct taxes
• Net National Disposable Income = NNP(Factor Cost)+Net Indirect Taxes+Net current transfer from the rest of the world
• Gross National Disposable Income = Net National Disposable Income+ Depreciation

Examples

Given below are the examples mentioned:

1. A family from United Nations live with annual household incomes of $85,000, and they paid 15% tax annually, so what is the disposable income of the family.

So 15% of $85,000 is $12,750 (Annual taxes paid family)

• Disposable Income = $85,000 – $12,750
• Disposable Income = $72,250

2. Robert is planning to buy a new home in the near future, so he is looking to invest in a new home. So, before making an investment decision in new, he wants to make sure that his disposable personal income is not committed towards something else. So, to on decision, Robert calculates disposable personal income by using the disposable Formula.

• Robert Annual Income = $90,000
• Tax expenses and Payroll Deduction = $15,000

DPI = Annual Income – Taxes and Other Payroll Deductions

• DPI = ($90,000 – $15,000)
• DPI = $75,000

So Robert Net Income is $75,000, and the new home has a retail price of $45,000 and a loan payment of $10,000, which is approximately 13% of Robert DPI. So depending upon other expenses of Robert it seems to be reasonable to buy a new home.

Excel Application Snapshot.

Advantages

Given below are the advantages mentioned:

• This has an impact on the stock market, and if the income of the company increased, it increases the stock valuation and due to this overall value of the stock market increased.
• If an individual income increased, in that case, the household has more money either to save or spend and because of this, consumption is increased.
• If higher the disposable it increases to buy luxury goods.
• If Disposable is increased, it is a good sign for Small Businesses as customers have more money to buy goods and services.
• This is used by a nation to calculate the overall Nation net disposable and Gross Disposable income.
• It is used as an important economic indicator by the nations and to maintain the health of the economy when needed.

Disadvantages

Given below are the disadvantages mentioned:

• It is decreased in that case household have less amount in hand to spend and save because of these consumers consume less.
• If the consumption decreased due to less disposable, it results in a decrease in the corporate sales and corporate earnings and the value of the individual stock also decreased.
• Direct taxes have straight through an impact on disposable if it’s increased, it reduces the purchasing power of an individual.
• It depends on some of the factors like real disposable, employment, job security, household wealth, expectations and sentiment, some market factors.
• Taxes play an important role in Disposable totally depends on increase and decrease of taxes by the government of different nations.

To maintain disposable income nations at the desired level is the job of the government, and if it fails to do so, consumers will have less money to spends on goods and services, and due to this counties, the economy will impact.

Important Points to be Noted about Change in Disposable Income

• If Disposable decreases household has less money to spend and save.
• If Disposable increased household have more money to spend and save and consumption increased.
• This fluctuates as taxes and tax rates differ from country to country.
• When Income changed, it’s induced changes in consumption of Goods and Services, which is called induced consumption, and it varies with the income.
• The fact state that change in permanent income of household leads to a change in consumption pattern of household, rather than changes in temporary Income.

Conclusion

So from the above description, it is clear that disposable is the amount available to individuals’ households after paying all government taxation. This is for all citizens of the country is monitored by different government agencies for countries economy purposes and health of the economy. Nations continuously make efforts to increase or maintain disposable at a certain level as it is an important economic indicator for the nations. It has been observed that if the National Income of the country is higher, then income is also higher. It mainly depends on taxes, and it fluctuates as taxes fluctuate. Personal Disposable Income is an important indicator for the nation’s economy, and it determines the individual’s ability to consume goods and services.

This amount is important for a household to spend it on a day to day necessities. Personal income in the United States in January 2019 was 15913.40 USD billion, and it increased to 15944.70 USD billion in February 2019. Personal Disposable Income is averaged 5273.04 USD Billion in the United States from 1959 to 2019.

Recommended Articles

This has been a guide to What is Disposable Income. Here we look at the calculation and examples of Disposable Income, including types of advantages and disadvantages. You may also take a look at the following articles to learn more –

1. Contribution Margin vs Gross Margin
2. Costs vs Expenses | Know the Difference
3. What is the Disposable Income Formula?
4. Contribution Margin Income Statement