Discretionary income is the extra money you have after paying for necessary expenses. It’s “discretionary” because how you use it is up to you and your own discretion. It’s money you’re free to spend, save or invest as you like, because your essential priorities are already paid for.
In this blog, you will understand discretionary earnings, which means it is left money after paying taxes and necessary expenses. It is the amount of income that everyone spends on travel, entertainment, and luxury goods or invest.
Discretionary Income Examples
Discretionary earnings include funds for entertainment, travel, vacation, hobbies, luxury purchases, home improvement, gifts, and investing.
How is Discretionary income calculated?
To calculate your discretionary income, start by adding up your monthly essential expenses, including fixed costs, like rent and insurance, and variable costs, like food. Subtract the total from your monthly after-tax income (in other words, the amount in your monthly paychecks, after your employer deducts for taxes). That’s your discretionary income, the amount you have for non-essential “wants.”
In short, discretionary income equals gross income minus taxes and necessary expenses.
How is discretionary income calculated for student loans?
If you have student loan payments, discretionary income is an important calculation. The Department of Education uses it to set your repayment plan and how much you should pay every month.
Expendable income vs Disposable income
Expendable income is different from “disposable income,” which is the money left over only after paying your income taxes. Disposable income typically still needs to cover essential expenses, like rent, utilities, health care, and food.
In short, disposable income equals gross income minus Income taxes
Why is Discretionary income important?
Understanding your discretionary payment meaning is important to making a household budget, planning for the future, and allocating funds for emergencies.
A common rule of thumb for household budgets is the 50-30-20 rule, where 50% of your income goes to your needs, 30% to your wants, and 20% towards savings. Once 50% of your income has been allocated to needs, the rest is considered discretionary.
Under the 50-30-20 rule, you can spend, save, and invest your discretionary income as you like. And you might think “discretionary” just means your shopping budget. But it’s more than entertainment, splurges, extras and luxuries. It’s also dream vacations, cars, weddings, and other milestone events.
A lot of things that require saving and investing have to be allocated from your discretionary income. Be mindful that savings are pulled from your discretionary income.
Bright can help you budget and save
Bright can get you debt-free fast, so you have more discretionary income, and your Bright Plan can build a budget, so you can track your spending habits.
Bright can also help you save more automatically, moving funds to personalized saving pockets, to reach your goals faster.
If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your bank and your cards, set a few goals, and let Bright get to work.
FAQs
1. Can discretionary expenses vary from person to person?
Yes, discretionary expenses can vary significantly from person to person. Because this depends on individual preferences, lifestyle choices, and financial circumstances. Factors like income level, location, and personal values influence how people allocate their discretionary funds.
2. How can individuals manage discretionary spending effectively?
Anyone can manage discretionary spending effectively by creating a budget, tracking expenses, and setting priorities. You can consider budgting tools or apps to monitor real-time spending, review your expenses to align your financial goals and maintain finacial stability.
Suggested reading
How do you get a Loan with Bad Credit and Consolidate Debt?
Is Debt Consolidation With Bad Credit Possible?
References
https://www.investopedia.com/terms/d/discretionaryincome.asp
https://www.nerdwallet.com/article/loans/student-loans/what-is-discretionary-income
