Guy Penn, a fiduciary investment advisor and the owner of St. Louis Private Advisors, agrees. “Disposable is somewhat subjective, so it doesnt lend itself well to a hard formula,” Penn says. In general, he says his firm defines disposable income as net income minus fixed recurring expenses, minus short-term emergency savings and long-term investment savings.

Youll also hear people talk about discretionary income, which is a subset of disposable income. Its almost the same thing, and sometimes the terms are used interchangeably. While disposable income represents your income after taxes, discretionary income refers to the money left over after taxes and your necessities, like groceries and rent. You decide how to use this money to invest, save and spend at your discretion.

Subtract the tax amount from annual gross income

When you subtract the tax amount from the initial annual income, you get your disposable income, which can be used for spending or saving.

  1. Disposable income is the money you have left from your income after you pay federal, state, and local taxes and any other mandatory payments to a government.
  2. Disposable income can be calculated as personal income minus personal current taxes.

Macroeconomics – 22: Disposable Income and Equilibrium (No trade)

Steps to calculate disposable income

To calculate your disposable income, follow these steps:

1. Identify your annual gross income

Your annual gross income is listed on your offer letter once you get a full-time position. Your company may also have a payroll software where you check your annual income at the top of your benefits package. In this example, well say that your annual gross income is $200,000.

2. Note all tax rates

When youre calculating your disposable income, note your federal, state and local tax rates, so you can get a clear picture of the exact amount of disposable income you have available for spending or saving. For this example, well use the state of Florida since it only applies federal taxes, which is approximately 32% for the annual gross income of $200,000.

3. Multiply your annual gross income by the tax rate

For our example in the state of Florida, multiply your annual gross income by the federal tax rate to get the amount of taxes you have to pay.


$200,000 x 0.32 = $64,000 federal taxes

4. Subtract the tax amount from annual gross income

When you subtract the tax amount from the initial annual income, you get your disposable income, which can be used for spending or saving.

$200,000 – $64,000 = $136,000 annual disposable income

What is disposable income?

Disposable income can also be called net pay, and it accounts for the money you have left over after federal, state and local income taxes. Social Security and Medicare fall under the scope of federal taxes. Disposable income is also an economic factor to see if there is an increase in consumer spending on products. It is helpful for organizations to analyze all financial data relevant to disposable income, including taxes, to make an informed spending decision.

How disposable income is different from discretionary income

Discretionary income is a separate financial metric that can be seen as similar to disposable income because of the impact these figures have on the economy and the money an individual spends on products. Despite these similarities, the main difference between disposable and discretionary income is that your discretionary income is what you have left after you cover the essentials such as housing, utilities and health insurance. In other words, your disposable income is what you have initially available to pay for essentials, before you have discretionary income available for anything else.

What can disposable income be used for?

Once taxes get taken out, you have a variety of choices to spend your disposable income. Its recommended that you abide by the 50/30/20 (Needs, Wants, Financial Goals) rule to spread out your spending.

A few ways that you can spend disposable income to fit this rule include:

Rent or mortgage

Rent or mortgage is a fixed cost that you pay each month for housing, and that only changes if you decide to renew your lease or move into a different apartment complex or housing development. This falls under the “needs” category, as housing is one of the first expenses you account for when paying your bills. Take note of the location you decide to reside in and if its in proximity to your workplace to save on transportation costs.


Grocery shopping is the course of action you take to feed yourself and your significant others, so youll need to account for spending on groceries for your disposable income. Try to buy healthier foods when youre in the grocery store to improve your health, while being conscious of your spending habits. This approach meets the 50/30/20 guideline and may save money in the long run on medical care.

Health insurance

Your health insurance is usually taken out of your paycheck depending on the level of coverage you have with your employer. When youre looking for a position, youll need to consider the benefits package a company has before accepting an offer. Once you know what the benefits package includes, youll have a better idea of how to budget your disposable income to meet your financial goals. If you are an independent contractor, you will have to account for your health insurance separately.


When you travel for personal reasons, be sure to plan logistics, the cost of each activity and how much time youre taking off. With so many variables involved in travel, its important to estimate just how much of your disposable income will be allotted to each travel expense. Even while traveling, your basic living expenses back home still must be accounted for as well, including rent or mortgage and utilities.


Going out to dinner can be done to celebrate an accomplishment or completing the end of the workweek. However, to save more of your disposable income most of the time, its best to combine dining with your travel expenses and treat it as a luxury instead of a necessity. Also, try to plan meals on the weekend, so you can eat at home during the week to save on expenses.

Retirement savings

You need to incorporate savings strategies that prioritize your retirement. To do this, save at least 20% of your disposable income and deposit it into a separate account, so you know how youre going to use your savings. Companies may offer a 401(k) retirement account with automatic payroll withholding, which allows them to match the contributions you make every paycheck. Make sure that you take advantage of your 401(k) if its a part of your benefits package, and take note of any fees for early withdrawal.


If you choose to invest in shares of stock for companies on the stock market, you need to save a small chunk of your disposable income to make this an option. You can start investing with $500 or $1,000 in the bank. Start with investing in low-risk stocks, evaluate the returns you made and find out if youre comfortable investing more with the same company or moving onto another company. You can go at your own pace and stop when you need to.

Paying debts

If you earned a bachelors or masters degree, you may have to pay off student loans with your disposable income. If youre an entry-level employee with a lower salary, try to make low monthly student loan payments to spread out how much you owe. Additionally, select a fixed interest rate on your student loan to make it a fixed cost over your payment period.


What is the formula for disposable income?

Disposable Income = Personal Income – Personal Income Taxes.

How do you calculate disposable income from GDP?

Disposable personal income measures the after-tax income of persons and nonprofit corporations. It is calculated by subtracting personal tax and nontax payments from personal income. In 1999, disposable personal income represented approximately 72 percent of gross domestic product (i.e., total U.S. output).

What is disposable income example?

Your disposable income is the money you have to pay necessary bills like rent or mortgage, utilities, insurance, car payment, food, clothing, credit card bills and more.

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