Key Difference – Disposable vs Discretionary Income
Disposable and discretionary income are two economic measures used to measure the amount of consumer spending. Both are important economic indicators that can be used to showcase economic robustness. Disposable and discretionary income are similar in nature apart from minor differences. The key difference between disposable and discretionary income is that disposable income is the amount of net income available to a household or an individual for spending, investing and saving purpose after income taxes are paid whereas discretionary income is the amount of income that a household or individual has for investing, saving and spending after both taxes and necessities are paid.
CONTENTS
1. Overview and Key Difference
2. What is Disposable Income
3. What is Discretionary Income
4. Side by Side Comparison – Disposable vs Discretionary Income
5. Summary
What is Disposable Income?
Disposable income is referred to as the amount of net income available to a household or an individual for spending, investing and saving purpose after income taxes are paid. It can be calculated by subtracting income taxes from income.
E.g. A household earns an income of $350,000, and it pays tax at 25%. The disposable income of the household is $262,500 ($350,000 – ($350,000* 25%)). This means that the household has $262,500 for spending, investing and saving purpose.
Individuals and households consume goods and services (necessities) such as food, shelter, transportation, healthcare and leisure while also saving a portion or funds. They also undertake investing activities to earn returns. When the disposable income for all the individuals or households is collated, the national disposable income for a country can be arrived at. Since this amount is an absolute measure, it cannot be used to compare disposable income among countries. For this reason, ‘Disposable income per capita’ is calculated for a country by adding the collective income of all individuals of the country less taxes and dividing the sum by the country’s population.
Disposable Income per Capita = Total Disposable Income/ Total Population
The following table shows the disposable income per capita figures for the top five countries in 2016, according to the Organization for Economic Cooperation and Development (OECD).
| Country | Per Capita Disposable Income ($) |
| United States | 41,071 |
| Luxembourg | 40,914 |
| Switzerland | 35,952 |
| Norway | 33,393 |
| Australia | 33,138 |
Figure 01: Disposable Income
What is Discretionary Income?
Discretionary income is the amount of income that a household or individual has for investing, saving and spending after both taxes and necessities are paid. Therefore, discretionary income is the income left after both taxes and living expenses are covered. Discretionary income is very similar to disposable income and is derived from disposable income.
Often savings are considered once the necessities are covered. Prevailing interest rates in the country has an impact on the level of savings; if higher interest rates on savings are offered, individuals are encouraged to save more. Investing options are also considered especially when higher returns can be obtained more than the interest that can be earned from savings.
What is the difference between Disposable and Discretionary Income?
Disposable vs Discretionary Income |
|
| Disposable income is referred to as the amount of net income available to a household or an individual for spending, investing and saving purpose after income taxes are paid. | Discretionary income is the amount of income that a household or individual has for investing, saving and spending after taxes and necessities are paid. |
| Necessities | |
| Disposable income does not take necessities into account. | Discretionary income considers necessities into account. |
| Dependency | |
| Disposable income is a standalone concept. | Discretionary income is derived from disposable income. |
Summary – Disposable vs Discretionary Income
The difference between disposable and discretionary income depends on how each is calculated. Discretionary income is derived from disposable income whereas discretionary income is calculated after necessities are taken into account. As a result, disposable income is higher than discretionary income within the same household. Both measures can be used to assess consumer spending after considering the effect of tax. However, these measures should also take into account the willingness of people to make purchases.
References
1.”What is the difference between disposable income and discretionary income?” Investopedia. N.p., 24 May 2017. Web. 26 May 2017. <http://www.investopedia.com/ask/answers/033015/what-difference-between-disposable-income-and-discretionary-income.asp>.
2. Sebastian, Andrew. “5 Countries With the Most Money Per Capita.” Investopedia. N.p., 12 Sept. 2016. Web. 26 May 2017. <http://www.investopedia.com/articles/markets-economy/090616/5-countries-most-money-capita.asp>.
3.”What is disposable income? definition and meaning.” BusinessDictionary.com. N.p., n.d. Web. 26 May 2017. <http://www.businessdictionary.com/definition/disposable-income.html>.
Image Courtesy:
1. “Household debt / disposable income” by Stacy Herbert (CC BY 2.0) via Flickr