Shawn has a masters of public administration, JD, and a BA in political science.
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 of Disposable Income
From the standpoint of an individual person, disposable income is the income that you have left over after you've 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.
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's 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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Let's say that you earn a salary of $4,000 a month. You have to pay local, state, and federal income and payroll taxes of $1,000. You also have a house payment of $1,000, a car payment of $300, and you pay about $200 a month in credit card bills. While your gross income for the month is $4,000, your disposable income is $1,500. You're free to spend all of this at whatever businesses you like - movie theaters, retail shops, dining out, etc.
Disposable income is the amount of income left over after an individual or business pays all mandatory expenses. It's what's left over for you to spend on what you want or to save and invest. This is opposed to gross income, which is any increase in the wealth of an individual or business over a particular period of time, of which the mandatory expenses dips into. Disposable income is important for businesses because they need consumers with disposable income to buy their products or services. Businesses also need their own disposable income to invest in their business for purposes of survival and growth.
The teachings provided by this lesson on disposable income can help you as you prepare to:
Distinguish between the disposable income of an individual person and that of a business
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