How to Calculate Disposable Income
Disposable income equals personal income minus personal taxes, it is the money households actually have available to spend or save.
The Disposable Income formula
Calculator
Enter personal income, personal taxes and consumption to get disposable income, saving and the average propensities.
Wages, interest, dividends and transfer payments received.
Income and other personal taxes paid to government.
What the household spends out of disposable income.
After tax the household has $57,600 to divide between spending and saving.
- Saving
- $5,760
- Saving position
- Saving
- APC (consumption ÷ DI)
- 0.9
- APS (saving ÷ DI)
- 0.1
- Effective personal tax rate
- 20%
Whatever disposable income is not consumed is saved, here $5,760.
Negative saving means the household is spending more than it earns after tax.
90 cents of each disposable dollar is spent.
APC and APS always add to 1, because every disposable dollar is either spent or saved.
The share of personal income taken by personal taxes.
How to calculate Disposable Income, step by step
- 1Start with personal income. Total income households receive, including wages, interest, dividends, and transfer payments such as unemployment benefits.
- 2Subtract personal taxes. Take out income taxes and the other personal taxes households pay to government.
- 3Split what is left. Whatever remains is disposable income, and every dollar of it is either consumed or saved.
- 4Find the propensities if asked. APC = consumption ÷ disposable income and APS = saving ÷ disposable income, and the two add to 1.
Worked example: Disposable Income
A household receives $72,000 in personal income and pays $14,400 in personal taxes. Disposable income = 72,000 − 14,400 = $57,600. If the household spends $51,840, saving = 57,600 − 51,840 = $5,760, so APC = 51,840 ÷ 57,600 = 0.90 and APS = 5,760 ÷ 57,600 = 0.10.
Disposable Income questions
What is the difference between personal income and disposable income?
Personal income is what households receive before personal taxes; disposable income is what remains after them, and it is the base for consumption and saving.
Do transfer payments count in disposable income?
Yes, transfers such as unemployment benefits are part of personal income, so they raise disposable income even though they are excluded from GDP.
Is the MPC based on disposable income or on GDP?
On disposable income. MPC = change in consumption ÷ change in disposable income.
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