UK Accounting Glossary
Disposable income is money that can be spent, saved, invested or otherwise disposed of after taxes and certain other obligations (such as union dues, employer-mandated health care costs or other similar fees) have been paid. Another term for disposable income is take-home pay. Since most fees and taxes are beyond the control of workers, the only ways to increase disposable income is by a pay raise, working additional hours, developing an additional source of income or finding different employment at a higher rate of pay with more disposable income. An increase in disposable income is considered a sign of prosperity while a drop in disposable income is often a trailing indicator of an economic slowdown. Disposable income is also known as discretionary income or spendable income.
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.
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. 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 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. The Consumer Leverage Ratio is the expression of the ratio of Total Household Debt to Disposable Income.
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This glossary post was last updated: 9th February 2020.