Wealth is assets minus what is owed
Definition
Disposable income: income left after direct taxes have been taken off and any state benefits added, which is what a household actually has available to spend or save.
- Wealth is worked out by adding up everything a household owns and then subtracting everything it owes.
- Assets include property, savings, pensions and shares, while debts include a mortgage, a loan and any credit card balance.
- The answer can be negative, because a household whose debts are larger than its assets has negative wealth.
Example
- A household owns a home worth £280,000, has £12,000 in savings and a car worth £6,000, and owes £195,000 on its mortgage and £3,000 on a loan.
Step 1: add up the assets:
assets=£280,000+£12,000+£6,000=£298,000 \text{assets} = \pounds280{,}000 + \pounds12{,}000 + \pounds6{,}000 = \pounds298{,}000 assets=£280,000+£12,000+£6,000=£298,000Step 2: add up the debts:
debts=£195,000+£3,000=£198,000 \text{debts} = \pounds195{,}000 + \pounds3{,}000 = \pounds198{,}000 debts=£195,000+£3,000=£198,000Step 3: subtract the debts from the assets:
wealth=£298,000−£198,000=£100,000 \text{wealth} = \pounds298{,}000 - \pounds198{,}000 = \pounds100{,}000 wealth=£298,000−£198,000=£100,000- The household's wealth is £100,000, far less than the value of the property alone, because most of that value is still owed to the lender.
Income adds the sources together
- Total income is found by adding every source a household receives over the same period, which is normally a year.
- Keep the period the same across every source, because mixing a weekly wage with an annual pension gives a meaningless total.
- Convert first, so a weekly figure is multiplied by 52 and a monthly figure by 12.
- Take direct taxes off and add benefits on to reach the disposable figure, which is the one used for comparing living standards.
Example
- A household receives a salary of £2,100 a month, a part-time wage of £150 a week and £480 a year in savings interest.
Step 1: put every source on an annual basis:
salary=£2,100×12=£25,200 \text{salary} = \pounds2{,}100 \times 12 = \pounds25{,}200 salary=£2,100×12=£25,200 part-time wage=£150×52=£7,800 \text{part-time wage} = \pounds150 \times 52 = \pounds7{,}800 part-time wage=£150×52=£7,800Step 2: add the three annual figures together:
total income=£25,200+£7,800+£480=£33,480 \text{total income} = \pounds25{,}200 + \pounds7{,}800 + \pounds480 = \pounds33{,}480 total income=£25,200+£7,800+£480=£33,480- The household's income is £33,480 a year before any tax is taken off.
Quintile shares compare rich and poor
Definition
Quintile: one of five equal-sized groups a population is split into, ranked from poorest to richest.
- Ranking households and splitting them into fifths lets the share going to each fifth be compared directly.
- The quintile ratio divides the income of the richest fifth by that of the poorest fifth, so a larger answer means a wider gap.
- A ratio of 1 would mean the two fifths received the same, and the further above 1 the answer sits, the more unequal the distribution.
Example
- In the financial year ending 2024 the UK quintile ratio was 5.6, so the richest fifth of households had 5.6 times the disposable income of the poorest fifth (Source: ONS).
Step 1: taking an illustrative £15,000 for the poorest fifth, multiply by the ratio to estimate the richest fifth:
richest fifth=5.6×£15,000=£84,000 \text{richest fifth} = 5.6 \times \pounds15{,}000 = \pounds84{,}000 richest fifth=5.6×£15,000=£84,000Step 2: subtract to turn the ratio into a cash gap:
gap=£84,000−£15,000=£69,000 \text{gap} = \pounds84{,}000 - \pounds15{,}000 = \pounds69{,}000 gap=£84,000−£15,000=£69,000- The £15,000 is illustrative while the 5.6 is the published ratio, so the method shows how a ratio converts into a gap in pounds.
Say what the figure means
- Every answer needs a sentence saying what it tells you, because a number on its own is not an economic conclusion.
- A wealth figure says what a household would have left if it sold everything it owns and cleared everything it owes.
- A quintile ratio says how many times more the top fifth receives, which is a statement about the gap rather than about anyone's living standard.
Self review
- How is a household's wealth calculated?
- Why can wealth be a negative number?
- A household earns £1,800 a month and £2,000 a year in interest. Calculate its annual income.
- What does a quintile ratio of 5.6 tell you?
- What is disposable income?
