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What is Disposable Income?

Disposable income is what is left over after a person has paid all personal income taxes due on income.
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  • Written By: Ken Black
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 October 2014
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Disposable income is the income that is left over after an individual has paid all personal income taxes. This is a very important measure to determine not only an individual's overall economic health but the health of society as a whole. It is one of the primary measures of personal wealth but it is not the only measure that can be used.

It is important to understand that disposable income is not the same as discretionary income. Discretionary income is the income left over after taxes and other routine expenses. Thus, the value of income that is disposable is, nearly always, higher than discretionary income, but may not truly reflect the costs a person has to deal with routinely.

Depending on the situation, some agencies may use the terms disposable income and discretionary income interchangeably. As such, it is important for the person filling out any forms to understand what information is being sought. This is key to giving the most accurate information possible and avoiding claims of fraud, especially if the form is an official form from the government. If there is any question about what is being asked for, it is always best to ask questions rather than making any assumptions.

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In general, at least in the United States, disposable income is usually 10 to 15 percent of a person's total income. The rest usually comes out in a variety of taxes. Of course, this depends on the state, in which you live, your income level and amount of withholdings. In other countries, it can also be determined by looking at the average tax rate and may be more or less than the figures quoted for the United States.

During an economic slowdown, disposable income may decrease. However, this is not due to the fact that taxes increase, but rather total income is likely to decrease during this time. This can lead to a harder time meeting existing obligations and a hesitancy to create new ones.

In some countries, it may be possible that gross income and disposable income are the same thing. This would be the case in countries where there is no personal income tax. This could be because the country has no personal income tax levy or because the person does not earn enough money for income taxes to be assessed.

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sunshine31
Post 2

Suntan12- Disposable income in 2009 showed the highest drop in disposable income since 1949.

Disposable income dropped almost 10%. This also explains why the unemployment rate is so high.

When people have less, they spend less which adversely affects businesses. There are less companies hiring, and more people that can’t find jobs.

As a result businesses have automated many jobs and have eliminated some jobs probably forever. Unemployment in the U.S. is about 10%, but in Florida it is almost 12%. I think that higher disposable income equals a better economy wth more jobs.

suntan12
Post 1

Your disposable income is really the income that you have to spend after you have been your bills.

Disposable incomes are highest in times of prosperity. For example, during the Reagan Administration, disposable incomes across-the-board rose 15%.

When disposable income is high there is high economic growth because people spend more money. And when people spend more money, companies tend to hire more.

In times of economic decline, disposable income also falls to lower levels and causes people to spend less. As a result, businesses pull back and hire less employees.

They also try to cut expenses more and may even lay off people due to a bad economy.

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