What Qualifies as Disposable Income?


Personal Finance 101: What Qualifies as Disposable Household Income?

disposable household income

Going over your household budget together helps eliminate misunderstandings.

Like most professions, economics has its own peculiar jargon that industry insiders bandy about, which might leave us ordinary folks scratching our heads. While you might have little everyday use for such concepts as GDP, M1 and velocity of circulation, having basic understanding of some basic personal finance terms can help you plan your household budget.

After-Tax Income

The Internal Revenue Service considers all income that isn't specifically exempted from taxation to be taxable income, but income taxes aren't the only taxes your employer withholds from your check. You have to pay Social Security and Medicare taxes, and most states and some local municipalities also hit you with income taxes. Whatever is left after you've paid your taxes is your disposable income. "It's not what you make, it's what you get to keep that matters," says certified public accountant, Mark Noel.

Disposable Income

Your disposable household income is what you have available to create your household budget. "Budgeting by itself is not a difficult process, but there can be a certain amount of stress involved, particularly if there are more people than just yourself involved," Noel says. If you're combining your income and expenses with your spouse or significant other, both persons should be involved with determining how your disposable household income is spent. Chances are you will have different money personalities. "You might be a spender while your spouse is a saver. Some things your significant other might consider a necessity, you might think are frivolous and wasteful. That doesn't mean one person is right and the other wrong. It just means you view money differently. That's why it's important that you come to an agreement on how to budget your disposable income," Noel adds.

Needs Vs. Wants

Your disposable income is all the money you have -- it has to cover both your needs and your wants. Necessities are your obligations and living expenses, such as your mortgage or rent, utilities, food, transportation and debt payments. Economists refer to whatever money you have left, after you've paid all of your necessary expenses, as your discretionary income. You can use your discretionary income to pay for anything you want.

Discretionary Income

While disposable income has a well-established definition, the interpretation of discretionary income is a bit more fluid. You might work in an industry that requires you to dress in the latest fashions, so a significant clothing budget might be a necessity for you, but only a want for someone else. A general rule of thumb is this: the lower your necessary expenses, the higher your discretionary income.

Feel That Pinch

Private wages and salaries in April 2013 increased $1.6 billion over the previous month, according to the the U.S. Department of Commerce's Bureau of Economic Analysis. If you don't feel any richer, it could be that even if your gross income increased, your disposable income didn't keep pace. The BEA's April 2013 Personal Income and Outlays report indicates personal current taxes also increased by $10.4 billion during that same period. The result was a national decrease in personal disposable income.