Discretionary income: meaning, and how to calculate yours

What discretionary income means

Cambridge Dictionary defines it as the part of someone's income that is available to spend on things other than necessary things such as food, clothing and fuel. A second definition adds that it is money left after paying tax and the things someone needs, like living costs.

Discretionary means up to your discretion. Dinner out, a trip, a hobby and saving are choices. Rent is not.

How to figure it out

Start with your net monthly income, the pay that lands after taxes. Subtract your needs: housing, utilities, food at home, transportation, insurance and minimum debt payments. What remains is discretionary.

Where the line falls is yours to draw. Is a phone a need? Internet? Many people count a basic version as a need and anything fancier as a want. Our guide to budget categories lists a common set.

Discretionary vs disposable, and a couple's view

Disposable income is usually pay after tax, before needs. Discretionary is what remains after needs too. Some programs use the same words for a formula of their own, so check their definition before you use the term on a form.

In a couple, each person's discretionary money is a good thing to agree on in advance. Some couples give each person an equal personal amount, and some scale it by income.

A worked example: one month

• Net monthly income: $4,500.
• Needs: rent share $1,600, utilities $200, groceries $450, transportation $450, insurance and phone $300 = $3,000.
• Discretionary income: $4,500 - $3,000 = $1,500.
• Of that, saving $675 leaves $1,500 - $675 = $825 for fun.
• Needs are $3,000 / $4,500 = 66.7% of take-home.