Define: Disposable Income

UK Accounting Glossary

Definition: Disposable Income



What is the dictionary definition of Disposable Income?

Dictionary Definition


Disposable income is money that can be spent, saved, invested or otherwise disposed of after taxes and certain other obligations (such as union dues, employer-mandated health care costs or other similar fees) have been paid. Another term for disposable income is take-home pay. Since most fees and taxes are beyond the control of workers, the only ways to increase disposable income is by a pay raise, working additional hours, developing an additional source of income or finding different employment at a higher rate of pay with more disposable income. An increase in disposable income is considered a sign of prosperity while a drop in disposable income is often a trailing indicator of an economic slowdown. Disposable income is also known as discretionary income or spendable income.


Advertisement



Full Definition of Disposable Income


Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income, minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major category of personal (or, private) consumption expenditure) yields personal (or, private) savings.

Restated, consumption expenditure plus savings equals disposable income after accounting for transfers such as payments to children in school or elderly parents’ living arrangements.

The marginal propensity to consume (MPC) is the fraction of a change in disposable income that is consumed. For example, if disposable income rises by $100, and $65 of that $100 is consumed, the MPC is 65%. Restated, the marginal propensity to save is 35%.

Discretionary income is income after subtracting taxes and normal expenses (such as rent or mortgage, utilities, insurance, medical, transportation, property maintenance, child support, inflation, food and sundries, &c.) to maintain a certain standard of living. It is the amount of an individual’s income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of:

       Discretionary income = Gross income - taxes - necessities

Despite the formal definitions above, disposable income is commonly used to denote discretionary income. The meaning should, therefore, be interpreted from context. Commonly, disposable income is the amount of “play money” left to spend or save. The Consumer Leverage Ratio is the expression of the ratio of Total Household Debt to Disposable Income.


Advertisement



Synonyms For Disposable Income


take-home pay, discretionary income, spendable income


Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/disposable-income/
Modern Language Association (MLA):
Disposable Income. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. April 04, 2020 https://payrollheaven.com/define/disposable-income/.
Chicago Manual of Style (CMS):
Disposable Income. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/disposable-income/ (accessed: April 04, 2020).
American Psychological Association (APA):
Disposable Income. PayrollHeaven.com. Retrieved April 04, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/disposable-income/

Definition Sources


Definitions for Disposable Income are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 9th February 2020.