Disposable/Discretionary income
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Disposable income is gross income minus income tax on that income.[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 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:
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- Discretionary income = Gross income - taxes - necessities
Despite the formal definitions above, disposable income is commonly 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.
[edit] 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]
[edit] References
- ^ BEA : Disposable personal income
- ^ http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=58&Freq=Qtr&FirstYear=2007&LastYear=2009
- ^ portal.wsiz.rzeszow.pl/plik.aspx?id=12166
- ^ http://www.parl.gc.ca/information/library/PRBpubs/prb0520-e.htm
- ^ Linden, Fabian (1998). "A Marketer's Guide to Discretionary Income (abstract)". US Department of Education. http://www.eric.ed.gov/ERICWebPortal/custom/portlets/recordDetails/detailmini.jsp?_nfpb=true&_&ERICExtSearch_SearchValue_0=ED310997&ERICExtSearch_SearchType_0=no&accno=ED310997. Retrieved on 2007-12-27.
- ^ Donav, Stef (undated). "No-doc loans let you get a mortgage when you don't fit the mold" (PDF). pmbgloans.com. http://www.pmbgloans.com/pdfs/InterestdotcomKruger6-06.pdf. Retrieved on 2008-01-14.
[edit] 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
- OECD Disposable income statistics
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