what is disposable income 
disposable income is the amount of money that an individual or household has to spend or save after federal state and local taxes and other mandatory charges are deducted economists closely monitor disposable personal income as a key indicator of the strength of the economy also known as disposable personal income or net income it includes both necessary spending on essentials like food and rent and discretionary spending on leisure and luxury items investopedia paige mclaughlinformula and calculation of disposable incomethere are several ways to calculate disposable income but the main formula used is total income is the entirety of gross wages that an individual earns this is sometimes adjusted to reflect factors that alter that total for example products returned by a customer would reduce a sole proprietor s total income taxes are eliminated from disposable income because they are mandatory an individual may down size to save money or splurge on a fancier car but there s no wiggle room in taxes understanding disposable incomedisposable income is the amount of money that a person or family has left after paying their taxes it is the portion of income that can be spent on necessities such as food and rent people can also use disposable income to pay for discretionary items leisure activities and investments this type of income plays a critical factor in the economy it drives how much consumers spend how much companies earn and how much people save and invest by extension it drives consumer demand for goods manufacturing levels distribution and the overall well being of the economy different statistical measures and economic indicators are derived from the number for disposable income it is the starting point for calculating measurements such as discretionary income personal savings rates marginal propensity to consume mpc and marginal propensity to save mps special considerationsthe federal government uses a slightly different method to calculate disposable income for wage garnishment purposes this is the seizure of a portion of a wage earner s paycheck before it is paid every payday until the amount due for back taxes or overdue child support is paid for this purpose the government uses disposable income as a starting point to determine how much of each paycheck to seize the amount garnished may not exceed 25 of a person s disposable income or the amount by which a person s weekly income exceeds 30 times the federal minimum wage whichever is less the amount paid into a gross income retirement plan also is deducted from disposable income in this calculation 1