Disposable income, discretionary income, and wealth are all terms used to describe a person’s financial resources. However, they have different meanings and are used in different contexts.
- Disposable income is the amount of money left over after taxes have been paid. It is the income that a person or household has available to spend, save, or invest.
- Discretionary income is a subset of disposable income. It is the amount of money left over after taxes and essential expenses have been paid. Discretionary income can be used to buy non-essential goods and services, such as vacations, entertainment, and luxury items.
- Wealth is a measure of a person’s or household’s total financial assets. It includes the value of all assets, such as cash, investments, property, and businesses. Wealth can be used to generate income, provide security, and make investments.
Here is a table showing the similarities and differences between disposable income, discretionary income, and wealth:
|Characteristic||Disposable income||Discretionary income||Wealth|
|Definition||The amount of money left over after taxes have been paid.||The amount of money left over after taxes and essential expenses have been paid.||A measure of a person’s or household’s total financial assets.|
|Use||Can be used to spend, save, or invest.||Can be used to buy non-essential goods and services.||Can be used to generate income, provide security, and make investments.|
|Calculation||Gross income – taxes||Disposable income – essential expenses||Total assets – total liabilities|
|Similarities||All three terms are used to describe a person’s financial resources.|
|Differences||Disposable income includes all income after taxes, while discretionary income only includes income after taxes and essential expenses.||Wealth is a measure of total assets, while disposable income and discretionary income are measures of income.|
Also, from another source:
Disposable income, discretionary income, and wealth are related but distinct concepts.
Disposable income refers to the amount of money a person or household has available to spend or save after taxes and essential expenses, such as housing, utilities, and food, have been deducted. It represents the income that can be “disposed of” at the discretion of the individual or household.
Discretionary income, on the other hand, refers to the income remaining after essential expenses have been paid but before non-essential or optional expenses are incurred. It represents the funds available for non-essential purchases, such as vacations, entertainment, dining out, luxury goods, and savings.
Wealth, or net worth, encompasses the total value of a person’s or household’s assets minus their liabilities. It includes tangible assets like real estate, vehicles, and investments, as well as intangible assets such as stocks, bonds, and savings accounts. Liabilities, such as mortgages, loans, and credit card debt, are subtracted from the total value of assets to calculate net worth.
It is important to note that disposable income and discretionary income are focused on the flow of funds over a specific period, typically monthly or annually, while wealth represents the accumulation of assets and liabilities over time.
As for their distribution, disposable income, discretionary income, and wealth can vary significantly across different individuals, households, and countries. Factors such as income inequality, social policies, taxation systems, and economic conditions can influence how these resources are distributed. Generally, wealth tends to be more concentrated in the hands of a few individuals or families, while disposable income and discretionary income may have a wider distribution. However, the distribution of these resources can vary greatly depending on the specific context and location.