Discretionary income
Money left after taxes and essential living costs, available for wants, extra saving or faster debt payoff.
What it means
In everyday use, discretionary income is what remains from take-home pay after covering necessities such as housing, food, utilities, transportation, insurance and minimum debt payments. It is the part of income you have real choice over: dining out, travel, hobbies, extra savings or extra debt payments.
The term also has a narrower technical meaning in federal student loan repayment, where income-driven plans define discretionary income with a specific formula based on income above a multiple of the federal poverty guideline. That figure is not the same as the everyday budgeting version.
Example
Suppose your take-home pay is $3,800 a month and essentials cost $2,600. Your discretionary income is $1,200 a month.
How it’s used
- Deciding how much can go toward goals or wants
- Estimating payments under income-driven student loan plans
- Measuring how much room a budget has to absorb price increases
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.