how to use disposable income
unlike taxes disposable income is relatively flexible and highly individualized it includes both essential and non essential spending we ve listed some of the key spending categories that people can and often do use with their disposable income discretionary income is equal to disposable income minus all payments for necessities including a mortgage or rent payment health insurance food and transportation this portion of disposable income can be spent at will discretionary income is the first to shrink after a job loss or pay reduction businesses that sell discretionary goods like jewelry or vacation packages tend to suffer the most during recessions their sales are watched closely by economists for signs of both recession and recovery the personal savings rate is the percentage of disposable income that goes into savings for retirement or other goals for several months in 2005 and 2006 the average personal savings rate dipped into negative territory for the first time since 1933 2 this means that americans spent all of their disposable income every month and still had to tap into savings or debt to make ends meet marginal propensity to consume is the percentage of each additional dollar of disposable income that is spent immediately while marginal propensity to save is the percentage that is saved both the marginal propensity to consume and the marginal propensity to save are positively correlated to income as people make more money they re more likely to buy things and save for the future this is usually shown graphically as an upward sloping curve importance of disposable incomedisposable income is not only important to individuals but holds massive value to society as a whole its essential qualities include interpreting disposable incomethe bureau of economic analysis bea tracks the month to month changes in disposable personal income the agency reported that disposable income increased by 40 2 billion or 0 2 in april 2024 compared to the previous month 3 a decrease in this month over month measurement would mean that households have less residual income compared to the prior month the federal reserve is also interested in disposable income as household savings and spending influence monetary and fiscal policy the federal reserve bank of st louis reported aggregate real disposable personal income of over 16 94 trillion as of april 2024 it was substantially higher about 20 42 trillion in march 2021 when the federal reserve raised interest rates to cool inflation 4certain industries like agriculture have good reasons to watch the numbers on disposable income the u s department of agriculture measures the percent of disposable income an average individual spends on food that helps farmers plan future harvests 5