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Understanding Disposable Income and What to Do With It

Money comes in. Taxes come out. What’s left is called disposable income. It’s the money you take home after taxes. 

Between 1990 and 2023, Indiana's per capita disposable income rose from $15,633 to $54,717[1]. This represents an increase of about 250% over 33 years. However, Indiana’s economy is expected to grow more slowly in the next year[2]. This could make it harder for incomes to keep rising. 

So, how do you manage the money you have available after taxes are paid? Here, you’ll learn what disposable income is, how to find yours, and smart ways to use it. You’ll find out how much you can safely spend, how much to save, and how to plan for the future.

What Is Disposable Income?

Disposable income is the money you have left after paying your taxes. You can use this money to pay for needs, like rent or food, or for wants, like new clothes or a weekend trip. It’s also what you can use to build your savings or pay down debt.

What Is Not Included in Disposable Income?

Taxes are the only thing taken out before you calculate disposable income. This includes:

  • Federal income taxes

  • State income taxes (if your state charges them)

  • Social Security and Medicare taxes

Things like rent, groceries, and gas are not subtracted yet. That comes next when you figure out what’s left for fun or savings.

How to Calculate Disposable Income

Here’s a simple formula: Your income – taxes = disposable income

Let’s look at an example: You earn $3,000 each month. You pay $500 in taxes.

$3,000 – $500 = $2,500, which means you would have $2,500 in disposable income.

If you're paid hourly or your paycheck changes, this number might change each month. In that case, track your income and taxes for a few months, then find your average.

Disposable Income vs. Discretionary Income

These two terms are often confused. Here’s the difference:

  • Disposable income is what’s left after taxes.

  • Discretionary income is what’s left after taxes and covering your basic needs.

Let’s say you make $2,500 after taxes. You might spend $2,000 on rent, bills, loan payments, and food. That would leave $500 of discretionary income — the money you have for fun or extra savings.

Knowing the difference helps you plan better. Disposable income shows what you could spend. Meanwhile, discretionary income shows what you really have left for non-essentials. 

What to Do With Your Disposable Income

Once you know how much disposable income you have, the next step is deciding what to do with it. This is where smart money habits come in.

1. Cover the Essentials First

Even though you’ve already paid taxes, you still need to pay for things like:

  • Rent or mortgage

  • Groceries and personal care

  • Utilities (gas, electric, water)

  • Car payments or public transport

  • Health insurance and medications

These are your needs, and they come first.

2. Start Saving (Even a Little)

After covering needs, save as much as you can — even if it’s just a few dollars. Disposable income makes saving possible, and every bit helps.

You can start with small goals and build up. A little can go a long way over time.

Good savings goals might include:

  • A $500 emergency fund

  • Saving for school or a new car

  • A vacation or holiday fund

  • Long-term savings for a home or retirement

Want to see how far your savings could go? Set a goal and track your progress.

You might also like: How to Start Saving with Small Deposits 

3. Pay Down Debt

If you have credit cards, student loans, or other debt, it’s smart to use part of your disposable income to pay it down faster. The sooner you pay off debt, the less you spend on interest.

You can start with the smallest balance (snowball method) or the highest interest rate (avalanche method). Choose whichever strategy helps you stay motivated. Use a debt consolidation calculator to find out how much combining your debt might help you save. 

You might also like: How to Become Debt-Free With Simple Planning 

4. Use Some for Fun

Once you’ve handled needs, savings, and debt, it’s okay to spend a little on things you enjoy. This helps you stay balanced and enjoy life while staying on track.

Some fun-but-smart ways to spend might include:

  • Going out to dinner once a month

  • Buying something for your home

  • Treating your family to a local event

  • Donating to a cause you care about

Just make sure you're not spending more than you have. Keep fun spending within limits so you don’t lose progress.

You might also like: Enjoy Your Spring Bucket List on a Budget in Brownsburg 

5. Plan Ahead With a Budget

Creating a monthly plan can help you decide how to use your disposable income each time you get paid. With Centier’s Money Management tools, you can see your income, expenses, savings goals, and spending all in one place.

Budgeting doesn’t mean cutting out fun. It just means knowing where your money goes.

You might also like: Money Management: How To Create a Budget That Works For You 

6. Adjust as Life Changes

Your disposable income may go up or down based on life events. A new job, a raise, a move, or even tax changes can all shift your numbers. It’s a good idea to check your budget and savings plan every few months and make updates if needed.

Put Your Disposable Income to Work With Centier

Disposable income is more than leftover money. It’s your chance to build the life you want. Once you know how to calculate what you have available, you can make smart choices with it. Cover your needs, save for your future, pay off debt, and enjoy life in balance.

Want more help managing your money? Check out Centier’s Financial Resources for more guides, tools, and expert tips.


Sources: 

[1] https://www.statista.com/statistics/1066042/indiana-disposable-personal-income/

[2] https://www.in.gov/sba/files/1.-Economic-Outlook-April-16,-2025.pdf