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!
- Auto Expenses
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.
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.