Disposable personal income

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Disposable personal income
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Disposable personal income (or so called DPI) - sum of the income the individual has, after adding all income from different sources, such as wages, mixed income, net property income, social benefits and other potential incomes that the individual may get, and deducting taxes from it. In other words, amount of money that the person gets after payment of all income taxes needed (Ruser, 2004). Other names that can be called for this type of income are disposable earnings as well as after-income tax. In national accounts equation would look like following way: personal income – personal current taxes = disposable personal income. When it comes to the deductions in the form of taxes it implies : social security, medical insurance as well as other obligatory fees that the individual pays for the government as part of the suppress for instance for retirement system.

If we take a look at this definition from the macro level, we need to mention that this indicator is paid very much attention, as it is a way to evaluate the state of the economy in general. Disposable personal income can be also considered as one of the determinants for demand and spending. The amount of this particular type of income of an individual or group of individuals can help economists to understand how much money the consumer can spend and save. For instance, to understand, how previous statement looks like in real life we can use the example of the situation in USA previous years. In the 2019 and 2020 years, when the biggest economies faced crisis (which implied US economy as well), which is related to the COVID pandemic. The pandemic had big influence on the DPI, but in the 2021 the indicators rose $214.3 billion (Bureau of economic analysis, 2021). Also economists use this notion as one of the points to use for further calculations: discretionary income, personal savings rates, marginal propensity to save and marginal propensity to consume.

Discretionary income - this notion is often being confused with the disposable income. Although these terms are interconnected, they have different meanings. Discretionary income is the amount of money, that the individual has after all mandatory payments are done (for instance, rent or mortgage, transport, electricity). From the economic, as if was mentioned about disposable income is tracking more on the macro level, while discretionary on the micro. The amount of money, which is considered as discretionary income can be spend at will. Also, this type of income is the one, which “suffers” the most after the decrease in salary or loss of the job. The formula for discretionary income will be following: disposable personal income - cost of all necessary expenses

Personal savings rates - this notion is used to call the percentage of the disposable personal income for a particural goal of saving. For instance, retirement.

Marginal propensity - there are two different notions related to marginal propensity:

  • marginal propensity to consume- is the percentage of each additional conventional unit of the disposable personal income that is spent immediately.
  • marginal propensity to save - is the percentage of each additional conventional unit of the disposable personal income that is saved.

Governmental usage

For the purposes of garnishing wages, the federal government calculates disposable income using a somewhat different methodology. This is the withholding of a portion of a worker's paycheck prior to payment each pay period until the sum owed for unpaid back taxes or past-due child support is paid.

The government uses disposable income as a starting point to calculate how much of each paycheck to withhold for this purpose. If a person's weekly income is greater than 30 times the federal minimum wage or 25% of that person's disposable income, whichever is smaller, it may be garnished. In this calculation, the amount contributed to a gross income retirement plan is also subtracted from disposable income.

The Bottom Line

After taxes, individuals use their remaining funds for consumption of requirements and wants. This is known as disposable income. Rent, bills, groceries, gas, and other costs are paid out of disposable income. Discretionary income is the amount that is left over after paying for necessities and savings. One can make more money or pay less tax to enhance disposable income. Collectively, rising disposable income gives households more money to spend or save, which inevitably fuels rising consumption. One of the key factors influencing demand is consumer spending; it generates the demand that enables businesses to remain successful and add new employees.

References

Author: Kseniia Zalyvadna