Discretionary income is the money you have left after paying taxes and essential living expenses. Understanding this number is crucial for making smart decisions about savings, investments, and lifestyle spending.
How This Calculator Works
This calculator determines your true discretionary income by:
- Starting with Gross Income: Enter your total earnings before deductions
- Subtracting Taxes: Federal, state, and FICA taxes are deducted
- Deducting Essential Expenses: Housing, utilities, food, transportation, insurance, and minimum debt payments
- Revealing Discretionary Income: The remaining amount available for savings, entertainment, and non-essential spending
The Formula Explained
Discretionary Income = Gross Income - Taxes - Essential Expenses
Essential expenses include:
- Housing (rent/mortgage, utilities)
- Food (groceries, not dining out)
- Transportation (car payment, insurance, gas, or transit)
- Healthcare (insurance premiums, medications)
- Minimum debt payments
- Childcare (if applicable)
Everything else—entertainment, vacations, dining out, hobbies—comes from discretionary income.
Step-by-Step Example
Mike's Discretionary Income Calculation
| Item | Monthly Amount |
| Gross Income | $6,000 |
| Federal Tax | -$720 |
| State Tax | -$300 |
| FICA | -$459 |
| Take-Home Pay | $4,521 |
| Rent | -$1,400 |
| Utilities | -$200 |
| Groceries | -$400 |
| Car Payment | -$350 |
| Car Insurance | -$120 |
| Gas | -$150 |
| Health Insurance | -$200 |
| Student Loan Min | -$250 |
| Discretionary Income | $1,451 |
Mike has $1,451/month for savings, entertainment, dining out, and other non-essentials.
Frequently Asked Questions
What is discretionary income?
Discretionary income is the money remaining after you pay all taxes and essential living expenses. It's the amount you have complete freedom to spend on wants, savings, investments, or additional debt payments. Understanding this number helps you budget realistically.
How is discretionary income different from disposable income?
Disposable income = Gross income minus taxes (take-home pay) Discretionary income = Disposable income minus essential expenses
Disposable income is your total after-tax money. Discretionary income is what's truly "extra" after covering necessities like housing, food, and utilities.
Why does discretionary income matter for loan applications?
Student loan servicers and some lenders use discretionary income to determine income-driven repayment plans. Federal programs like PAYE and REPAYE cap payments at 10-20% of your discretionary income, making it a critical number for student loan borrowers.
What counts as an essential expense?
Essential expenses are necessities required for basic living and work: housing costs, utilities (electric, water, heat), basic groceries, transportation to work, health insurance, required medications, minimum debt payments, and dependent care. Dining out, streaming services, and gym memberships are NOT essentials.
How much discretionary income should I have?
A healthy target is 20-30% of gross income as discretionary. If your discretionary income is below 10%, you may be house-poor or carrying too much debt. If above 40%, you might consider increasing retirement contributions or paying down debt faster.
What should I do with my discretionary income?
Financial experts recommend the following priority order: (1) Build an emergency fund (3-6 months expenses), (2) Get employer 401(k) match, (3) Pay off high-interest debt, (4) Max out retirement accounts, (5) Save for goals (house, education), (6) Enjoy life responsibly.
How can I increase my discretionary income?
Two approaches: Increase income (overtime, side hustle, career advancement) or Decrease essential expenses (refinance mortgage, move somewhere cheaper, reduce car costs, shop smarter for insurance). Reclassifying "wants" as "needs" is a common mistake—be honest about what's truly essential.
Is discretionary income the same as emergency fund potential?
Not exactly. Your emergency fund should cover essential expenses only, not discretionary spending. If you lose income, you'd cut discretionary spending to zero. Calculate your emergency fund based on essentials, but use discretionary income to fund it.
Key Points to Remember
- Be honest about essentials: Netflix and Starbucks are not essential expenses
- Track monthly variations: Utility costs and other expenses fluctuate seasonally
- Include annual expenses: Divide yearly costs (insurance, subscriptions) by 12
- Automate savings first: Direct discretionary income to savings before spending
- Review quarterly: As income or expenses change, recalculate your discretionary income