What Is Discretionary Income? (And How to Calculate It)

Discretionary income is the remaining income after paying for necessary expenses. The government uses discretionary income to determine how much a person can afford on income-driven monthly repayments for certain loans, like student loans. Consumers may also wish to know how much discretionary income they have to better manage money and track their budgets.

Discretionary income is something the federal government uses to determine how much people can afford to pay on certain loans, like student loans. And since 92% of student loans are federal student loans, it is important to understand what discretionary income means (and how it works) if you’re still paying on a balance.?

But even without payments on income-driven loans, you should learn about discretionary income to understand your finances and personal budget.?

Discretionary vs. Non-Discretionary Income

Discretionary income is the money left over after paying taxes and necessary cost-of-living expenses. People may spend discretionary income on the following:

• Investments
• Vacations
• Automobiles
• Entertainment
• Luxury items

Non-discretionary income pays for necessary expenses, including the following:

• Rent or mortgage payments
• Clothing
• Groceries
• Loans or debt
• Taxes

How Discretionary Income Differs from Disposable Income

Disposable income is the income remaining after paying taxes. This income is the total take-home pay employees have to pay for essential or non-essential expenses.

Discretionary income comes from disposable income. It includes all income people have after paying for necessary expenses (with non-discretionary income). The federal government also uses discretionary income to better understand how much people with income-driven loan repayments can afford each month.

How Much to Allocate Toward Discretionary Income

There is a popular budgeting rule called the 50/30/20 rule. It breaks down someone’s income like this:

• 50% goes to necessities (non-discretionary)
• 30% goes to discretionary spending
• 20% goes to savings

Another option is the 60/40 budgeting method. This rule allocates 60% of income to committed expenses, including housing, transportation, food or insurance. Part of the 60% also includes recurring expenses, like memberships or subscriptions. The other 40% of income splits between:

1. Short-term savings
2. Long-term savings
3. Retirement
4. Extra money for entertainment (and anything else)

If these budgeting rules don’t seem feasible, there are other ways to allocate income to avoid overspending in certain areas. Find the allocation strategy that makes the most sense for your financial situation, including savings and spending goals.?

Factors Influencing Discretionary Income

Discretionary income can change based on many circumstances. Under income-driven loan repayment plans, submitting information like income, state of residence or family size is often necessary each year. Some of the more specific factors include:

• Salary updates
• Location
• Marital status
• Family status
• Poverty guideline updates

Salary Updates

Changes in salary, such as receiving a raise or losing a job, will influence how much discretionary income a person has. People with income-driven repayment plans usually can qualify for $0 monthly payments if they don’t have an income due to unemployment.?

Location

Depending on where they live, people earn varying incomes (even for the same jobs). There are considerable discrepancies in wealth distribution?among U.S. states.

If someone moves to a new area, their income level may change, and discretionary spending allocation will change as a result.?

Marital Status?

Beginning a new marriage or ending a marriage through a divorce typically changes household income status unless one partner doesn’t earn an income. Having one more or fewer income will impact a budget significantly.

Family Status

Adding a new member to the family through pregnancy or adoption will influence how much discretionary spending is available after non-discretionary expenses.

Poverty Guideline Updates

The government updates federal poverty guidelines each year, so monthly payments may adjust based on these updates.?

How to Calculate Discretionary Income

Calculating discretionary income is essential for anyone planning to repay an income-driven loan (like a student loan). The formula to calculate discretionary income looks like this:

150% (or 100%) of federal poverty guidelines – household income = Discretionary income?

If you’re married, household income includes your spouse’s income for some repayment plans.

In some cases, people may find their discretionary income based on income levels is higher than they thought, meaning their loan payment requirements will also increase with certain repayment plans. For this reason, calculating this amount is essential to building an accurate budget.

Final Thoughts: Enhancing Your Money Management

Discretionary income is an essential factor in monthly repayment plans for income-driven loans. But certain life events and changes will influence these amounts.?

Understanding terms like discretionary income will help with money management but being “good with money” comes down to more than that. It takes practice.

The following steps will help anyone manage money more effectively:

1. Create a personal budget based on income.
2. Keep track of where spent money goes each month.
3. Save money for retirement.
4. Create a separate savings account for emergencies.
5. Develop a plan to pay off debt (and incorporate this into the budget).
6. Schedule time to look over progress and track habits.

Apps like?Mint or Goodbudget?can help people keep track of their finances but working with a professional advisor or even manually keeping track of spending each month are other options for tracking a budget.

By taking these steps, anyone can comprehend where their income goes each month and how much they put into discretionary vs. non-discretionary spending. Knowing this information and practicing good money management will help create better spending habits and an improved financial situation.

Top Takeaways

What is discretionary income? (And how to calculate it)

• Discretionary income is the additional income available after paying for necessary basic expenses, like taxes or bills.
• The federal government uses discretionary income to decide how much a person can afford toward income-driven payments on loans.
• People may also use discretionary income to better understand their budget and how they spend money each month.

(Reporting by NPD)