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What Is Disposable Income? - Definition & Explanation

Instructor: Shawn Grimsley
Most businesses need customers with disposable income and also need disposable income themselves to grow. In this lesson, you'll learn what disposable income is and discover some important related concepts. A short quiz will follow.

Definition

From the standpoint of an individual, disposable income is the income that you have left over after you have paid all taxes and other mandatory expenses such as home loan payments, consumer loan payments, and child support obligations. You can think of mandatory expenses as expenses required to be paid by law or a legally binding agreement.

From the standpoint of a business, disposable income is the net profit in a given period it makes after paying all necessary and mandatory business expenses such as taxes, debt service, vendor bills, and benefits and wages for its employees.

Conceptual Framework

Gross income may be defined as any increase in the wealth of an individual or business over a particular period of time. However, both businesses and individuals are required to apply some of their gross income on mandatory expenses such as taxes and loan payments. What is left over after applying gross income to the mandatory payments is disposable income. Disposable income can be saved, invested or spent on goods and services.

Disposable income is important for businesses for two primary reasons. First, in order for a business to generate revenue to pay its expenses and hopefully make a profit, it needs to have a supply of consumers available with disposable income to purchase its goods or services. Secondly, if a business wishes to survive, stay competitive, and grow, it must have disposable income to invest in such things as marketing, research and development, and expansion into new geographic markets or industries.

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