Disposable and discretionary income

Disposable and discretionary income

Disposable income is total personal income minus personal current taxes.[1] In national accounts definitions, personal income, minus personal current taxes equals disposable personal income.[2] Subtracting personal outlays (which includes the major category of personal (or, private) consumption expenditure) yields personal (or, private) savings.

Restated, consumption expenditure plus savings equals disposable income[3] after accounting for transfers such as payments to children in school or elderly parents’ living arrangements.[4]

The marginal propensity to consume (MPC) is the fraction of a change in disposable income that is consumed. For example, if disposable income rises by $100, and $65 of that $100 is consumed, the MPC is 65%. Restated, the marginal propensity to save is 35%.

Discretionary income is money you have after you've paid off all of your bills. Discretionary income is income after subtracting taxes and normal expenses (such as rent or mortgage, utilities, insurance, medical, transportation, property maintenance, child support, inflation, food and sundries, &c.) to maintain a certain standard of living.[5] It is the amount of an individual's income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of:

Discretionary income = Gross income - taxes - necessities

Despite the definitions above, disposable income is often incorrectly used to denote discretionary income. The meaning should therefore be interpreted from context. Commonly, disposable income is the amount of "play money" left to spend or save. The Consumer Leverage Ratio is the expression of the ratio of Total Household Debt to Disposable Income.

Use of discretionary income in high-income loan applications

When applying for a loan (mortgage, consumer loan), lenders may take into consideration a high-income applicant's discretionary income in order to assess the loan repayment capacity of the applicant. Discretionary income provides the lender with more information on the applicant's capacity to repay than the debt-to-income ratio in the case where the applicant has a lot of debt, but also a lot of income, such that the percent of available income may be smaller than normal standards would allow, but the actual amount of money is still large.[6]


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Look at other dictionaries:

  • Disposable/Discretionary income — Disposable income is gross income minus income tax on that income. [ [http://www.bea.gov/regional/definitions/nextpage.cfm?key=Disposable%20Personal%20Income BEA : Disposable personal income ] ] Discretionary income is income after subtracting… …   Wikipedia

  • Discretionary Income — The amount of an individual s income that is left for spending, investing or saving after taxes and personal necessities (such as food, shelter, and clothing) have been paid. Discretionary income includes money spent on luxury items, vacations… …   Investment dictionary

  • discretionary income — noun income remaining after deduction of taxes, social security charges, and basic living costs. Compare with disposable income …   English new terms dictionary

  • discretionary income — /dəsˌkrɛʃənri ˈɪnkʌm/ (say duhs.kreshuhnree inkum) noun income which is above that needed for subsistence and which may be spent at the earner s discretion. Compare disposable income …  

  • income — money that is being earned by the business. Glossary of Business Terms * * * income in‧come [ˈɪŋkʌm, ˈɪn ] noun 1. [countable, uncountable] money that you earn from your job or that you receive from investments: • The family pays more than 50% of …   Financial and business terms

  • disposable income — The amount of personal income an individual has after taxes and government fees, which can be spent on necessities, or non essentials, or be saved. Bloomberg Financial Dictionary * * * disposable income disposable income ➔ income * * * disposable …   Financial and business terms

  • income distribution — There are two types functional and size. The functional distribution of national income shows how the total is made up of income from land, labour, and capital, or the contribution of each factor of production to the national income. In this… …   Dictionary of sociology

  • income — noun ADJECTIVE ▪ high, large ▪ six figure (esp. AmE) ▪ The business provided him with a six figure income. ▪ sufficient ▪ average …   Collocations dictionary

  • disposable income — noun income remaining after deduction of taxes and social security charges, available to be spent or saved as one wishes. Compare with discretionary income …   English new terms dictionary

  • disposable income — dis*pos a*ble in come, n. (Economics) that portion of income which is available for spending on discretionary purchases; for individuals, it is usually calculated as total income less taxes. National disposable income, which is the disposable… …   The Collaborative International Dictionary of English

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