Archive / Investment Adviser (Level 1) / Evaluating the Financial Position of Clients

nism-series-xa-discretionary-expense-ratio-calculation[ INVESTMENT ADVISER (LEVEL 1) ]

A family incurs total monthly living expenses of ₹150,000, of which ₹60,000 represents optional discretionary lifestyle spending (dining out, entertainment, vacations). What is their Discretionary Expense Ratio?

[ A ]15.0%

[ B ]60.0% (Non-Discretionary Ratio)

[ C ]50.0%

[ D ]40.0% (Discretionary Expenses / Total Living Expenses)[ CORRECT ]

Takeaway

The family's Discretionary Expense Ratio is 40.0%, computed as discretionary spending divided by total monthly living expenses.

Derivation

Step 1: Discretionary Expenses = ₹60,000. Step 2: Total Living Expenses = ₹150,000. Step 3: Discretionary Ratio = (Discretionary / Total) x 100 = (60,000 / 150,000) x 100 = 40.0%. This ratio tells a planner what share of monthly outflow is flexible 'lifestyle' spending that could theoretically be reduced in a cash-flow crunch versus the 60.0% (Non-Discretionary Ratio) that represents essential, non-negotiable outflows — the exam tests whether candidates correctly identify which figure (discretionary vs. non-discretionary) the question is actually asking for, since both ratios are derivable from the same underlying numbers and easy to swap by mistake.

Why the others fail

A — 15.0%

15.0% does not match the arithmetic of ₹60,000 discretionary spending divided by ₹150,000 total expenses — it is an unsupported figure not derived from the given data.

B — 60.0% (Non-Discretionary Ratio)

60.0% is the Non-Discretionary Ratio (90,000/150,000, i.e., the essential-spending share), the mirror-image complement of the Discretionary Ratio actually being asked for in the question.

C — 50.0%

50.0% assumes an equal split between discretionary and non-discretionary spending, but the given figures (₹60,000 of ₹150,000) show discretionary spending is actually 40%, not half.