Disposable income
Encyclopedia
Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income
, minus personal current taxes
equals disposable personal income. 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 after accounting for transfers such as payments to children in school or elderly parents’ living arrangements.
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
. 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:
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.
(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.
Personal Income
In economics, personal income refers to an individual's total earnings from wages, investment enterprises, and other ventures....
, minus personal current taxes
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
equals disposable personal income. Subtracting personal outlays (which includes the major category of personal (or, private) consumption expenditure
Personal Consumption Expenditure
The Personal Consumption Expenditure is the component statistic for consumption in GDP collected by the BEA. It consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods, and services. It is essentially a measure of goods and...
) yields personal (or, private) savings.
Restated, consumption expenditure plus savings equals disposable income after accounting for transfers such as payments to children in school or elderly parents’ living arrangements.
The marginal propensity to consume
Marginal propensity to consume
In economics, the marginal propensity to consume is an empirical metric that quantifies induced consumption, the concept that the increase in personal consumer spending occurs with an increase in disposable income...
(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
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
, utilities, insurance, medical, transportation, property maintenance, child support, inflation, food and sundries, &c.) to maintain a certain standard of living
Standard of living
Standard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
. 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
Consumer leverage ratio
Consumer Leverage Ratio is a term popularized by William Jarvis and Dr. Ian C MacMillan in a series of articles in the Harvard Business Review and refers to the ratio of total household debt, as reported by the Federal Reserve System to disposable personal income, as reported by the US Department...
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 loanLoan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
(mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
, 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
Debt-to-income ratio
A debt-to-income ratio is the percentage of a consumer's monthly gross income that goes toward paying debts. A debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. A debt-to-income ratio (often abbreviated DTI) is the...
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.
External links
- A simple discretionary income calculator -- even though this says it's measuring "disposable income," using the economist's language, it's discretionary income.
- US Bureau of Economic Analysis - Chart of American Disposable Income
- Eurostat, News Release No. 60/2010, Household Savings and Disposable Income, 30 April 2010
- Eurostat, Statistics Explained, Glossary article: National Disposable Income
- OECD Disposable income statistics
- Google - public data: GDP and Personal Income of the U.S. (annual): Disposal Personal Income
- Google - public data: GDP and Personal Income of the U.S. (annual): Disposal Personal Income per capita