Though often used interchangeably, disposable and discretionary income are actually two different measurements of an individual’s spending power. Disposable income refers to an individual’s net income, take-home pay, or the amount remaining after personal income taxes have been deducted from their salary. For instance, if your annual salary is $100,000 and 32% of it goes toward taxes, your disposable income would be approximately $68,000.
Discretionary income, however, is the remaining sum after accounting for all essential expenses. These expenses include rent, transportation, food, and utilities, as well as insurance and other necessities. By subtracting these costs from your disposable income, you can calculate your discretionary income. Using the above example, if your disposable income is $68,000 per year and your essential expenses amount to $24,000 annually, your discretionary income would be $44,000 per year. This figure represents the funds available for spending or saving once all basic needs have been met.
Disposable income, often called your “take-home pay,” is the money you have left after income taxes are deducted. In other words, it’s how much you earn minus federal, state, and local taxes. Disposable income is what you use to pay for all of your living expenses, including the necessities and non-essentials.
Example: If you earn $6,000 a month and $1,300 goes to taxes, your monthly disposable income would be $4,700. You would use the $4,700 for bills, groceries, eating out, entertainment, and more.
Discretionary income is the amount of money you have after you’ve paid for all of your necessities, such as rent, groceries, utilities, insurance, and other essentials. Everything left over is your discretionary income, which is then used for things like vacations, hobbies, savings, investing, subscriptions, and other nice-to-haves. How is discretionary income calculated? Check out this example:
Example: If you earn $6,000 a month, $1,300 goes to taxes, and $3,000 goes to other necessary expenses, your discretionary income would be $1,700. You would use the $1,700 for a weekend away, an addition to your emergency fund, concert tickets, or other non-essentials.
The main difference between disposable and discretionary income is that while both tell you how much money you have after taxes, discretionary income also takes essential expenses into account.
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Both figures can provide you with helpful insights about your current financial situation.
Knowing the difference between disposable and discretionary income can be helpful for strategic budgeting. While disposable income tells you what you have left after taxes, discretionary income helps you understand how much you truly have to spend freely.
You can make more informed decisions about managing your debt, building strong savings, or setting realistic financial goals. Tracking both can also help you identify areas to cut back, adjust your lifestyle, or shift your priorities to maintain and improve your financial health.
When it comes to discretionary vs. disposable income, both can be increased. You can increase your disposable income by increasing your gross income—this could be done by getting a second job, applying for a larger role than your current role, or starting a side business. You can increase your discretionary income by paying off debt or reducing necessary expenses—this could be done by shopping around for a lower car insurance rate, clipping coupons at the grocery store, living with a roommate instead of living alone, or carpooling to work. Each individual’s circumstances will vary, and what changes will impact your disposable and discretionary income will be particular to you and your specific needs and preferences.
Increasing your disposable and discretionary income isn’t just about making a higher salary. It also involves effectively managing both your current spending and savings. Knowing how much of your income you’re spending each month and how you’re spending it can help you make more informed financial decisions.
From budgeting and tracking your spending to cutting down costs and reprioritizing your financial goals, discretionary and disposable income can be valuable figures to have in your back pocket. Now that you understand the difference, take a moment to assess your incoming and outgoing finances as you prepare for a strong financial future.
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https://fortune.com/recommends/banking/what-is-disposable-income/
https://www.capitalone.com/learn-grow/money-management/what-is-discretionary-income/
https://www.fool.com/knowledge-center/the-difference-between-disposable-income-and-discr.aspx
https://www.lendingtree.com/student/discretionary-income-student-loans/
https://www.healthcare.gov/glossary/federal-poverty-level-fpl/
https://www.investopedia.com/articles/pf/07/disposable_income.asp
https://calbizjournal.com/6-ways-to-grow-discretionary-income-without-earning-more-money/
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