The terms disposable income and discretionary income are often used interchangeably, but there is a difference between the two. Disposable income is the amount of money that is left over after all necessary expenses have been paid, while discretionary income refers to the money that is available for spending on non-essential items. Knowing the difference between these two types of income can help you better manage your finances.
What is Disposable Income?
Disposable income is the money that households have available for spending and saving after taxes have been paid. This is different from discretionary income, which is the amount of money that households have available for spending after essential expenses, such as housing and food, have been paid.
The term “disposable income” is most commonly used in macroeconomics, where it refers to the total income of a nation minus its debt payments. It is also a useful concept for understanding how much money individuals have available to spend on non-essential items. When disposable incomes are high, consumers tend to spend more, driving economic growth. When disposable incomes are low, consumers may cut back on spending, leading to a slowdown in economic activity.
What is Discretionary Income?
Discretionary income is the money that a household has available to spend on non-essential items after taxes and basic living expenses have been paid. This includes items such as entertainment, travel, and restaurants. It is important to note that discretionary income can vary greatly from one household to another, depending on factors such as job security, the number of dependents, and overall lifestyle. For example, a household with a single breadwinner is likely to have less discretionary income than a dual-income household. Similarly, a household with multiple dependents is likely to have less disposable income than a single-person household.
Ultimately, discretionary income is the amount of money that a household has available to spend on whatever they please. While there are no hard and fast rules about how this money should be spent, it is generally used to improve the quality of life.
Difference between Disposable Income and Discretionary Income
Disposable income is the total income earned by an individual or household after taxes have been deducted. This is the money that is available to be used for expenses, savings, or debt repayment. Discretionary income is the portion of disposable income that remains after essential expenses have been paid. This money can be used for leisure activities, non-essential purchases, or savings.
The amount of discretionary income will vary from person to person based on their individual spending habits and lifestyle choices. For example, someone who prefers to spend their money on experiences rather than material possessions will have more discretionary income than someone who chooses to buy luxuries. Understanding the difference between disposable and discretionary income can help you make informed financial decisions and better manage your money.
Conclusion
Disposable income is the amount of money that a person has left over after all debts and other regular payments have been made. This includes items such as taxes, rent, mortgage, car payments, etc. Discretionary income is the amount of money that a person has available to spend on extras or non-essentials. This would include things such as eating out at restaurants, vacations, entertainment expenses, etc.
Both disposable and discretionary income are important factors when it comes to budgeting and financial planning. It’s important for people to be aware of the difference between these two types of income so they can make informed decisions about their spending habits.
