Disposable income is the amount of personal income – direct taxes.
Example: In the UK, a person may have a gross salary of £31,000. But, after income tax and NI contributions have
been taken off, their disposable income may be £19,000 a year.
Discretionary income is disposable (after tax income) – all the payments necessary to meet current essential bills, (such as rent, insurance, food, transport, heating)
For example, a family may have a weekly disposable income of £365. But after bills like rent, insurance, heating, essential food, health insurance, work transport costs – they are left with a discretionary income of £80 a week.
This £80 is the amount that they have to spend or save after paying all essential living costs.
Example of higher interest rates
Higher interest rates would cause more expensive mortgage repayments, therefore discretionary income would fall for people who had to pay more on their mortgage repayments. Disposable income would remain unaffected.
Example of higher income tax rates
A rise in income tax rates would reduce the disposable income of those who paid income tax.
Use of disposable income
Savings ratio – The percentage of disposable income that is saved.
Marginal propensity to consume – The percentage of extra disposable income that is spent.
Disposable / discretionary income in everyday use
In everyday use, people often refer to disposable income as the amount that people have left over to spend or save. The correct technical term would be discretionary income. But, disposable income has a wider understanding and people often say disposable income, when the correct term would be discretionary income.
For example, this piece on Endies in the Guardian
These are people in work but with little spare cash after meeting rent and transport costs.
Low income earners in London, have little discretionary income because the cost of renting is so high. For households with incomes between £20,800 and £28,500 a year, rental costs have risen 4% in real terms over the last decade. Rent now accounts for about 41% of their incomes.
Disposable income in US
This graph shows how disposable income was affected by the 2009 recession.