Disposable/Discretionary income

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Disposable income is gross income minus income tax on that income.

Discretionary income is income after subtracting taxes and normal expenses (such as rent or mortgage, food, car payments, and insurance) 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.

Gross income - taxes - necessities = Discretionary income

Use of discretionary income in high-income loan applications

When applying for a loan (mortgage, consumer loan), lenders may take into consideration a high-income applicant's discretionary income in order to assess the loan repayment capacity of the applicant. Discretionary income provides the lender with more information on the applicant's capacity to repay than the debt-to-income ratio in the case where the applicant has a lot of debt, but also a lot of income, such that the percent of available income may be smaller than normal standards would allow, but the actual dollars are still large.

See also

• Household consumption expenditures

References

External links

• A simple discretionary income calculator -- even though this says it's measuring "disposable income," using the economist's language, it's discretionary income.
• US Bureau of Economic Analysis - Chart of American Disposable Income

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Last updated on Thursday March 06, 2008 at 09:50:54 PST (GMT -0800)
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