6 Min Read | Updated: December 15, 2023

Originally Published: August 13, 2020

What is Discretionary Income?

Discretionary income is the money available for spending, investing, or saving after taxes and essential expenses have been paid.

What is Discretionary Income?

This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.


Discretionary income is the spending money you have left over after paying for necessities like food, shelter, and clothing.

You’ll need to figure out your discretionary income if you want to make a financial management plan.

Knowing what affects your discretionary income – and how you can flex your needs – can help you stay financially fit now, and in the future.

Managing personal finances can be a challenging task, especially when unexpected life events force you to reevaluate your financial situation. Sudden job changes, unforeseen accidents, or planned adjustments can all necessitate a thorough revision of household budgets. During this process of reassessing needs, wants, and spending priorities, you may encounter the critical concept of discretionary income. 


The good news is that learning how to use your discretionary income can help you to navigate financially challenging times, be it now or in the future.   


But what exactly is discretionary income, and how do you figure yours out?

How Do You Define Discretionary Income?

Discretionary income is the amount of your income, or your household’s, that’s left over to spend, invest, or save after taxes and after spending on necessities.1 Generally speaking, necessities are taxes, food, shelter, and clothing. “Discretionary spending” is the term more often used in everyday conversations, but it’s derived from your discretionary income. Discretionary spending is a cost for something that is not essential to you personally or to your household,2 like little and big luxuries, vacations, and entertainment. Put simply, it’s the flipside of necessity/needs.


There’s a lot going on in there, so understanding what discretionary income means for you and your household might require close scrutiny. For example, what you – or others in your household – deem as “necessities” can prompt debate and disagreement. But to get to the basics, necessities are needs and obligations that you must pay for at monthly or regular intervals.

What’s the Difference Between Discretionary Income and Disposable Income?

The terms “disposable income” and “discretionary income” often get used interchangeably, but they’re actually two very different things. Disposable income is the amount you have left to spend or save after paying taxes.3 Often called your “take-home pay,” disposable income is what you have in hand, in a paycheck, or directly deposited, after federal, state, and/or local/municipal taxes are subtracted.


Your disposable income can also be affected by benefits like retirement account contributions, health insurance, and others.4 Experts note that disposable income can reflect several sources, such as: salary, freelance work, retirement benefits, Social Security, dividends, rental income, and child support.5


Discretionary income, on the other hand, is the portion of your disposable income left over after you pay for your necessities.

How Do You Figure Out Your Discretionary Income?

To figure out your discretionary income, a simple calculation might look like this: Discretionary Income = Disposable Income – Necessary Expenses.


Since your discretionary income depends on your needs – and necessities lists can be extensive – everybody’s calculation is different. For example, if you need a car, you’ll also need to pay for car insurance, registration, repair, and gas expenses. A house can mean mortgage, insurance, utilities, and upkeep. Rent can mean rent, rental insurance, and maybe even parking fees. Food ranges from everyday groceries to birthday and anniversary dinners out. Some list healthcare insurance under necessities, and many college grads include student loan repayment obligations.


As you can see, these “necessities” change a lot depending on your personal circumstances.

What Affects Discretionary Income?

Discretionary income can be affected by changes in salary, jobs, and tax rates. A pay cut, whether at your current employer or a new job with a lower starting salary, would likely affect discretionary income, meaning you might have to refocus your budget on necessities.


Global factors and federal policies can also impact individual and household economics. When the economy is strong , you may have higher discretionary income. But during time of inflation , discretionary income and spending may decline as prices on necessities increase. Since a combination of personal and external factors can affect your discretionary income, it’s important to be vigilant and maintain your budget as needed.

How Much Should You Set Aside for Discretionary Spending?

Some observers say discretionary income should be 30% of your take-home pay. If that’s unachievable, they suggest you reprioritize needs and wants.


Another approach to gaining visibility is the “50/20/30 budget rule.” With this approach, 50% of after-tax income is allocated to needs and obligations, 20% to savings and debts, and 30% to wants. Again, given your priorities and personal preferences in each category, you may have to make some choices as to what’s a need and what’s a want. Regardless, experts advise a minimum three months of after-tax income in an emergency fund beyond regular savings, investment, and retirement funds.

The Takeaway

In the realm of personal finance, understanding discretionary income is a valuable skill that can benefit anyone, regardless of their circumstances. It serves as a financial safety net, allowing you to adapt to changes in income, expenses, and life situations. Whether you're faced with unexpected challenges like a job loss or simply want to optimize your budget, the ability to manage discretionary income flexibly can make a significant difference in your financial well-being. Keep in mind that your needs and priorities may evolve over time, so regularly monitoring your discretionary income can become a beneficial practice in maintaining financial stability.

Laurel Nelson-Rowe

Laurel Nelson-Rowe is a longtime writer and editor focusing on business technology, cybersecurity, media, corporate culture, and quality management.


All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

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