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Current income classifications fail to realistically reflect income inequality ๐ŸงฎโŒ

Some economists argue that the B40, M40, and T20 income classifications are oversimplified, leading to exclusions in terms of subsidies and financial aid. According to them, income alone may not capture the full picture of a household's economic welfare, as other unaccounted factors like family size and regional cost of living will greatly impact their overall financial standing.


Source: New Straits Times

With such exclusions, the current classification system may overlook households that are grouped into different categories yet face similar financial challenges, thus failing to provide relevant financial aid.


Consistent with the argument, Economy Minister announced that starting next year (2024), the government is planning to phase out the B40, M40, and T20 income classifications which are based on gross income๐Ÿ’ฐ, in favour of household disposable income.


Disposable income is the net income households have for expenses and savings after deducting taxes. It is claimed to be a better reflection of household purchasing power and ability to consume, save and invest.


Note that both gross income and disposable income categorisations have their strengths and limitations.

For example, Gross Income reflects overall earnings, which is useful for evaluating households' financial stability and provides insights into their earning potential. This is valuable information when assessing job prospects and career prospects across the nation. Gross income allows for a standardised measure of income which accounts for variations in tax policies and structures, easing the analysis of income levels and financial situations across different households by the government and policymakers.


Though the stability of gross income classification is valuable for budgeting, financial forecasts and gauging a household's ability to meet fixed financial obligations, it omits the cost of living factor (e.g. the number of dependents) hence failing to capture income inequality within the nation.


For instance, a father of 10 living in Kuala Lumpur could be categorised as T20 based on his gross income. Realistically, however, he could be categorised as B40 in disposable income terms due to his commitments.

As such, disposable income categorisation would provide a more comprehensive and accurate perspective of households' financial situations and market potential, despite complex and more time-consuming calculations.


Various elements including disposable income and spending power need to be considered when determining the poverty line. Those with high incomes might not necessarily have greater purchasing power.๐Ÿ’ฅ


This revolutionized approach could minimise errors in aid or subsidy distribution made under the current static income-based approach.


DR MOHD EDIL ABD SUKOR

Associate Professor, Department of Finance, Faculty of Business and Economics, Universiti Malaya.


(Source: New Straits Times)

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In these challenging times, it is more crucial than ever that we budget our expenditures and plan our finances carefully to cope with rising prices.


Judging our spending power based on gross income alone is insufficient. Ensure to factor in your dependents, commitments (such as housing loans), and inflation rate to get a more accurate reflection of your financial status and allocate your spending more wisely.


Unsure if you are financially healthy? Click here to get a free assessment from us!

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