What is the difference between disposable and discretionary income?
This is a very good question. Although you only have one income, there are many ways of describing it based on the amounts withheld or deducted. For instance, your disposable income is the amount of money you have left over after you’ve paid all of your federal, state and local taxes. On the other hand, your discretionary income is the money you have left over after you’ve paid your taxes plus all of your necessary living expenses. The difference between them is just what and how much is deducted and withheld from your income.
To determine the total of your disposable income, take a look at your paycheck and add up all of your tax withholdings and subtract it from your gross income (your salary without any deductions). This is the money you have to spend on your necessities, health insurance, savings, investments, and even to splurge a bit.
Determining your discretionary income takes a couple of steps. A good way to start is to take a look at your net income (subtract all tax withholdings, health insurance, retirement plan contributions and other deductions from your gross income) and subtract all of your essential living expenses. Your living expenses can include your rent or mortgage, utilities, transportation, food, clothing, healthcare needs, and your savings. The amount left over is your discretionary income, which can be used for vacations and nonessential items and services.
Take note that these definitions can change slightly depending on the context in which they are used. For instance, a court can calculate your disposable income differently when determining your bankruptcy, wage garnishment or back-owed tax payments. Also, your discretionary income may be a bit more complicated to calculate since it may require an in-depth look into your finances and the need to develop a thorough budget. There are plenty of resources online to help you develop your budget, but if you need a more personalized approach and one-on-one help, you can always talk to a budgeting counselor from an NFCC member agency. They are a phone call away, ready to address your financial questions and concerns. Don’t hesitate to call.
Bruce McClary, Vice President of Communications
Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.