Question

what is disposable and discretionary income? please type the answer or write in print

Answer 1

Answer

Disposable income is the income available to a person after the income tax payment.A person who has taxable income.he/she has to pay a certain amount of tax (depends on the tax rate) from his/her income.The remaining amount left to the person after the deduction of tax, is called disposable income.If the income tax rate rises, the total tax payment also rises, and the disposable income falls.  

Example: Let a person's money income(Y) is $5000, and the tax rate for this income is 3%. The amount of tax(T), the person has to pay is, 3% of 5000.

So T= 3% of 5000

=3%*5000

= (3*5000)/100

= $150

Disposable income,Y_d = Y-T= $(5000-150)=$4850

This disposable income a person then spends as consumption payment to meet all his/her wants and needs, that includes spending for consumption of all the necessities,like food, clothes,medicine, health, rent, education, transportation, electricity, family expenditure, etc.

The discretionary income is the income left after all the consumption payment of disposable income. i.e., discretionary income is the disposable income minus the consumption payment.

How the person will use or spend the discretionary income, depends on his/her discretion or choice. This part of disposable income, a person can save, or can invest that generates future income. The person even may use the discretionary income for travelling, recreation, buying luxury goods etc.

From the above example,person's disposable income is $4850. Let his/her consumption payment is $4000. So the person's discretionary income is, $850($4850-$4000).

Thus disposable income = money income - tax

and, discretionary income = disposable income - consumption payment.

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