So you’re stressed about money—surprise, you’re a human being! We can’t assume exactly what’s worrying you. (Student loans? Saving up for your dream car? Splitting the bill on yet another friend’s bachelor/ette trip?) But we can suggest one way to overcome those feelings. And it starts with understanding what discretionary income is and how to calculate it.
Why, you might ask? When you have a firm grasp on the concept, you set yourself up for financial success and happiness—simple as that.
“It disciplines you, too, because if you don’t know how much you have left over and how much you can spend, then you’re going to overspend by not knowing the number,” says Aviva Pinto, a wealth manager at investment advisory firm Wealthspire Advisors.
Below, we’ll define discretionary income, provide some examples of discretionary spending, and offer tips for increasing your wealth (without having to suddenly inherit a billionaire’s fortune).
Looking to boost your income? Check out open jobs on The Muse and find the perfect fit for your financial goals »
What is discretionary income?
Discretionary income is the money you have left over after you’ve taken out all the deductions from your paycheck. These deductions include both mandatory payments as well as need-to-have items.
Mandatory payments include:
- Federal taxes
- State taxes
- Local taxes
- Social security
- Loans or debt
While need-to-have items could be:
- 401(k) payments
- Healthcare coverage
- Rent
- Mortgage
- Utilities
- Groceries
- Commuting costs
- Bills
- Car, home, renters, or miscellaneous insurance
“The things that are not required for day-to-day living—that’s the discretionary income,” Pinto says, adding that she tends to consider clothing mostly a discretionary item because you don’t need it in excess to function. “What is it that you need? Those things have to be paid for before you start looking at the things that you want,” she says.
What is the difference between discretionary income and disposable income?
Disposable income and discretionary income are often used interchangeably. The main difference between the two is that disposable income is just your total income minus taxes—or the money you’re actually able to spend, save, and budget with after the government takes their cut. Meanwhile, discretionary income is your disposable income minus stuff you really have to buy or own.
Discretionary income: Examples
What does discretionary income look like? Here are some examples of things you might spend it on:
- Travel: a plane, bus, or train ticket or rental car; a hotel, Airbnb, or rental home
- Luxury goods and services: a haircut, facial, manicure, or massage; nice clothing, jewelry, or accessories; a car, boat, or jetski; a housecleaner or landscaper; a meal out or to-go coffee
- Hobbies: a gym membership; a class, workshop, or conference; clothing, accessories, or tools relevant to your interests
- Childcare or caregiving services: preschool or daycare; a babysitter or nanny; a live-in nurse or doula
- Entertainment: a movie, show, or concert
- Personal investments: bonds, stocks, funds, or real estate; a side gig or business
- Emergency fund: Pinto is a big advocate of setting aside some of your discretionary income into an emergency fund—she recommends at least three months of salary. This protects you in the event of an accident, layoff, or health issue, and lessens the blow when you face unexpected problems like a flat tire or roof leak. “Things happen that you can’t always plan for, and having a little bit of extra cash on the side to go back to your normal life is a good thing to have,” she says.
Discretionary income is ultimately subjective. “Different people will have different discretionary budgets,” Pinto says. A Broadway buff might pay full price for the best seat at a musical, while a regular theater-goer might opt for the back row or standing-room-only. Some people like to get their nails done weekly; others prefer to spend their money on seasonal ski passes or happy hour with friends. “What’s important to some people is totally unimportant to others,” she says.
How to calculate discretionary income
Calculating your discretionary income is fairly simple, but it will indeed involve some math. (Time to pull out that fourth grade knowledge!)
To calculate discretionary income, you’ll first need to gather:
- A piece of paper and writing utensil, or a digital spreadsheet
- Your paycheck, or a summary of your monthly and yearly salary
- Your monthly or yearly credit or debit card statements
- Your monthly or yearly bills, including oil, gas, water, rent, mortgage, and/or insurance
- Documentation of any outstanding debts, including student or other loans
- A calculator (grab your phone!)
Next, follow these steps:
Step 1: Pick a time period to focus on
Discretionary income, like salary, can be divided up by day, month, year, or just about any time period you care about. When budgeting a client’s discretionary income, Pinto prefers to focus on a monthly cadence, as that’s also how often you pay for need-to-have items like rent and utilities. Multiply that by 12, and you have your yearly discretionary income.
Step 2: Figure out how much money you bring in within that time period
You’ll then want to add up all the money you make within that time period—your gross (before taxes) salary, as well as what you bring in from freelancing, side gigs, a personal business, or investments.
Step 3: Deduct mandatory payments
Next, take your gross income and remove taxes, fees, and debt payments. You can skip this step if this is already calculated through paperwork provided by your employer or accountant.
Step 4: Calculate how much you spend on need-to-have purchases
Consider the must-have items in your life—the insurance you have to pay for to live in your apartment complex, groceries, healthcare—and add up all those purchases for your set time period.
The best way to collect this information is to sift through your credit and debit card statements (many banks do the work of categorizing purchases for you), or save relevant receipts or bills.
Step 5: Subtract your need-to-haves from your net income
The last stretch! Take your total from step 3 and subtract your total from step 4. This is your discretionary income.
Tips for how to increase your discretionary income
In short, Pinto says, you can increase your discretionary income in one of two ways: “You either make more money or spend less.”
Here are some strategies for either route.
1. Negotiate a higher salary
People increase their discretionary income by finding new jobs all the time. But their secret isn’t the new role itself—it’s their negotiation strategy. They come prepared to argue their case with research and proof of their value, and practice how to respond to tough questions or rebuttals. All of that and more can be learned by reading our best tips for negotiating salary.
2. Set yourself up for a raise
Maybe you like your current job—you just feel you deserve to be saving more in discretionary income.
In that case, make sure you’re doing all the right things to set yourself up for a substantial raise now, if it’s review time, or in the near future. This includes doing your job well, tracking your accomplishments (try our raise worksheet for doing so!), getting in front of important stakeholders, and building new skills or refining old ones.
Read this next: The Secret to Learning a New Skill (Even When You're Busy)
3. Take on a side job
If you have the time—and motivation—to get a side gig or two, this can significantly pad your savings. Plus, side jobs come with a myriad of other benefits to your mental health and wellbeing.
Looking for ideas? Check out our list of part-time jobs that pay well.
4. Get thrifty
Pinto says the simplest way to immediately increase your discretionary income is to cut back on stuff you don’t truly need or spend a lot of money on. (To figure out which items fall into this category, start with a solid budget.)
But she’s quick to point out that cutting back doesn’t mean cutting something out of your life completely or forever. Instead, consider finding cheaper alternatives, such as waiting for a sale to purchase your favorite mascara or trading your book-buying binges for a free library card. Or, make some luxuries a real treat—for example, maybe you only get Starbucks on Fridays, or after a big work win.
5. Become mindful of why you spend
Consider whether your spending habits are a symptom of something else entirely. “A lot of times people are buying because it’s retail therapy,” Pinto says. The solution here is to substitute shopping for hobbies or activities that give you the same relief and satisfaction.
Pinto suggests asking yourself: “Can I go for a walk? Can I go for a bike ride? Can I do something that’s free that’ll still make me feel good?”
Discretionary income is the money you’re able to use for stuff you want, not stuff you need to live. The more you stay informed on what drives your discretionary spending, the easier it’ll be to keep your savings high and debt low—and peace of mind sane.