What Is Discretionary Income vs Disposable Income?
It’s no secret that the current inflation rate has been impacting Singaporeans from all walks of life. That said, it’s now more important than ever to understand how to handle your finances in the best way possible.
The ultimate principle of personal finance is to ensure you’re spending less than what you earn. By following this rule, you will never go out of budget.
But even if you follow this rule, there’s still a chance you’re overspending. This is why it’s integral to know the difference between Discretionary Income vs Disposable Income in Singapore.
Here at OMY Singapore, you will discover the following:
Discretionary Income vs Disposable Income in Singapore: What’s the Difference?
Think about it this way: businesses and people in Singapore have income. This refers to the money they are rewarded in exchange for providing assets or services. Income can also be gotten through investments. Your income is used to pay for your day-to-day expenses, necessities, and your wants.
Two of the key indicators of a person’s financial stability include discretionary income and disposable income.
Singapore disposable income is the money that you have left which is available to save, invest, and spend on essential and non-essential items after deducting taxes. Meanwhile, your average discretionary income is what you have to invest, spend, or save after all your necessities are paid.
Some examples of your necessities include your HDB loan monthly instalment, gas, food, utilities, clothing, auto loan monthly instalment, and other expenses related to transportation.
Let’s take a closer look at discretionary income vs disposable income below.
What is Disposable Income?
Before finding out discretionary income vs disposable, you first need to understand what disposable income is, which is how much a household or a person has available after paying taxes.
After you receive your paycheck, your disposable income is the net amount in your check.
To better understand what disposable income is, here’s an example.
Imagine your income is S$4,680 per month, which is the 2021 median income in Singapore. This amount is inclusive of CPF contributions which can fall to 17%. With your employer’s CPF contribution in mind, the median income falls around S$4,000.
More From OMY: A Comprehensive Guide to CPF in Singapore
And if your employee CPF contributions are 20%, your take-home salary from your median is only S$3,200.
But if you spend S$3,200 each month, you would still run out of money. Why?
This is because you need to think about your income tax. Since CPF contributions are not taxable, individuals who earn a median income need to account for the S$38,400 assessable income annually.
For this article, we’ll assume you get two income tax reliefs. First is earned income relief, and second is the NSman relief. There are other tax reliefs you can qualify for aside from these two.
The income relief you earn is based on your age. For example, we’ll assume you are not handicapped and you can save S$1,000 as your earned income relief. Take a look at the table below from IRAS to know more about this tax relief.
|Age as of 31 Dec of the previous year
||Maximum amount of earned income relief
|55 to 59
|60 and above
Meanwhile, for your NSman relief, men can get a maximum of S$1,500 tax relief. Meanwhile, married females (to an NSman or ex-NSman) can enjoy S$750 tax relief.
With this in mind, you can compute using the formula below:
S$38,400 – S$1,000 – S$750 = S$36,650
Keep in mind that Singapore follows a progressive tax system so the more money you earn, the higher your tax will be.
For those with a taxable income of S$36,650, the tax rate is 3.5%. Therefore, you must pay S$433 per year.
Aside from your income tax, you also need to take care of your property taxes. Around 9 in 10 households were owner occupied based on a 2020 survey. Based on the law, you must pay property tax based on the annual value of your property.
For instance, if you own a 4-room HDB flat, the annual value of your home, you need to pay S$73.60 to S$121.60 based on this table by IRAS.
|HDB Flat Type
|1- and 2-Room Flat
||$0 – $32.80
||$8.80 – $14.40
||$73.60 – $121.60
||$107.20 – $155.20
||$121.60 – $169.60
Based on the factors listed above, let’s compute your average disposable income in Singapore.
- Median income: S$4,680 per month (S$56,160 annually)
- S$4,680 – Employer CPF contributions: S$4,000 (S$48,000 annually)
- S$4,000 – Employee CPF contributions (S$800 x 6 = S$9,600 annually) – income tax (S$433) – property tax (S$73.60) = S$37,893 or S$3,157 per month
So what is your disposable income? It’s S$37,893 per year or S$3,157 per month.
What Is Discretionary Income?
Now that you know what disposable income is, you’re close to finding out the difference between discretionary income vs disposable income.
In many ways, understanding your average discretionary income is also a huge part of planning your finances.
Based on the data above, you can see that an individual who earns S$4,680 monthly can only spend S$3,157 per month.
This amount may be inflated since you need to take care of 7% GST on things you buy. Eventually, this decreases your spending power to only S$2,652 if you spend all your money. This means that your actual spending power is only around S$35, 241 annually.
This doesn’t take into consideration all the things you must buy to sustain a good life in Singapore.
To give you a picture of where Singaporeans spend most of their money, let’s take a look at what the bottom 20% of Singaporean households spend. This is based on the Household Expenditure Survey 2017/2018.
|Monthly expenses (essential)
||Amount spent by the bottom 20% of households in Singapore
|Food Serving Services
|Miscellaneous Goods & Services
|Housing & Utilities
|Furnishings, Household Equipment & Routine Household Maintenance
|Recreation & Culture
|Clothing & Footwear
|Alcoholic Beverages & Tobacco
|Non-Assignable Expenditure (pocket money for children, etc)
So if your household consists of 3 people, each person spends S$803 per month, which is around S$9,683 per year.
Keep in mind that this table is outdated (no current data available for 2022), so the real household spending is larger today.
When you deduct this from your disposable income, your discretionary income is around S$2,140 per month or S$25,674 per year.
That said, the computed average discretionary income above is only a range, and does not automatically mean you spend S$2,140 to splurge each month.
For instance, if you’re not in the bottom 20% of Singaporean households, then you’re surely spending more. And if not everyone in your household works, then the amount will be significantly lessened as well.
A Word From OMY
No matter how little or big you’re earning, planning your finances is something you should do. This starts with understanding Discretionary Income vs Disposable Income in Singapore. After you find out these two, you can finally grow your disposable income and discretionary income, cut down your unnecessary spending, or look for other tax reliefs you qualify for.
More From OMY: 5 Best Savings Accounts In Singapore With Highest Interest Rate