Definition of Discretionary Income

What is “discretionary income”? What is the definition of the term “discretionary income”?

A simple formula for determining discretionary income would look something like this:

Gross Income - Taxes - Personal Necessities = Discretionary Income

Alright - let’s take that from the top.

First off, gross income is the total amount of money that you make BEFORE taking off taxes, etc.

Personal necessities, on the other hand, are your essential costs, such as food, shelter, clothing, etc.

So, let’s say that your gross income every month is $5,000. After subtracting taxes, your net income is $3,500. In addition, you pay about $2,000 every month for your personal necessities (mortgage, food, etc).

So, your discretionary income every month would be $1,500.

$5,000 - $1,500 (Tax) - $2,000 (Personal Necessities) = $1,500 (Discretionary Income)

Discretionary income is money that can be spent on non-essential things such as stereos, vacations, movies, etc. Discretionary income can also be “spent” on saving or investing.

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