What is Discretionary Income? How it’s Calculated

Discretionary income is the amount of money you have left over after you have covered costs like taxes and essential spending. It plays a role in everything from day-to-day budgeting to long-term loan repayment. Understanding what it is, how it is calculated, and how it differs from related terms like disposable income can help inform financial decisions and planning.

In this article, we’ll discuss how discretionary income works, how it factors into your regular budget, and why it’s important.

Key points

• Discretionary income is the money remaining after taxes and essential living expenses, such as housing, food, utilities, and transportation, have been paid.
• It differs from disposable income, which is income after taxes but before essential expenses are deducted.
• Discretionary income can be used for non-essential spending such as dining out, travel, and entertainment, but can also be directed toward savings and investments.

The definition of discretionary income

Discretionary income is the money left over after paying for essential expenses. These expenses include things like:

• Rent or mortgage
• Groceries
• Utilities like electricity and water
• Insurance
• Car payments
• Taxes

It is money you can spend as you choose, on what you want rather than what you strictly need. ^[1]

What discretionary income might be spent on

What discretionary income is spent on is different for everyone, but some examples might include:

• Savings or emergency funds
• Investments
• Clothing
• Streaming subscriptions
• Gym memberships
• Vacations
• Concert tickets
• Video games
• Personal care

The average discretionary income

According to a recent survey carried out on behalf of Self, the average discretionary income people have is $1,500 per month. However, just under three-quarters (74.3%) of respondents reported having less than $500 left each month after paying for essential expenses. Alongside this, 62% of respondents said they run out of money at the end of the month at least some of the time.

Discretionary income vs disposable income

The terms discretionary income and disposable income may sound similar, but they have different meanings and are calculated differently.

Discretionary income differs from disposable income as it refers to the money that you can choose to spend on whatever you like. It is money you can spend “at your discretion” after essentials have been covered.

Disposable income, also referred to as net income, is all of the money a household or individual has left to spend, invest, and save after income taxes have been deducted. It is money you have “at your disposal” once you’ve paid your taxes. ^[2]

How is discretionary income calculated?

Let’s use a gross household income of $6,000 per month as an example. This means a household would earn $6,000 per month before paying income taxes.

If the household pays 25% of its income in taxes ($1,500), the remaining disposable income would be $4,500 per month.

Gross income ($6,000) - 25% in taxes ($1,500) = disposable income ($4,500)

To calculate discretionary income, we need to subtract the amount the household spends on essential expenses like rent, utilities, groceries, and car payments. If the household spends a further $2,500 per month on these essential costs, that would leave them with $2,000 in discretionary income.

Disposable income ($4,500) - essential spending ($2,500) = discretionary income ($2,000)

This means, in this example, the household would have $2,000 per month to spend on things like clothing, entertainment, vacations, investing, and saving. ^[2]

Note: Tax rates vary; this is an illustrative example only.

Discretionary income and student loans

For borrowers with federal student loans, this figure carries particular significance: the federal government uses discretionary income as one of the key factors to determine student loan payment amounts for income-driven repayment (IDR) plans, and to decide whether a borrower is eligible for certain repayment or rehabilitation plans.

The federal government's method for calculating discretionary income differs from a standard personal budget calculation. Rather than subtracting total taxes and essential living expenses from annual income, the federal government uses the Department of Health and Human Services' poverty guidelines, which vary by family size and state of residence, to arrive at a discretionary income figure. ^[3][4]

Income benchmarks

The specific income benchmark used varies depending on which repayment plan a borrower is enrolled in, as different plans set different thresholds for eligibility and payment amounts.

One example is the Repayment Assistance Plan, scheduled to launch in 2026, which ties monthly payments to a borrower's adjusted gross income (AGI). This refers to gross annual earnings reduced by eligible deductions such as retirement contributions, health savings account deposits, student loan interest paid, and self-employed health insurance premiums.

Borrowers should also note that payment amounts under income-driven plans are not static. A change in employment status, income level, state of residence, or household size, such as the birth of a child or a change in marital status, can all affect how much a borrower owes in a given year. Annual updates to the federal poverty guidelines can also shift payment calculations from one year to the next. ^[3][4]

The importance of discretionary income in financial planning

Knowing how much discretionary income you have is important when it comes to financial planning. Once you know how much of your earnings are left after ess ential expenses are covered, you can make more informed decisions about where that money goes.

This can make it easier to plan for things like:

• Building an emergency fund
• Paying down existing debts faster
• Working on long-term financial goals
• Vacations and holiday spending
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Factors affecting discretionary income

A number of things affect how much discretionary income you or your household has to spend each month. These include:

• Your income - Generally, people who earn more will have more discretionary income, but more costly lifestyles can reduce it.
• Tax rates - Higher taxes will leave you with less disposable income, and therefore less discretionary income.
• Outstanding debts - If you have a lot of debts to pay off each month, like loans or credit cards, this will reduce your discretionary income.
• Cost of living - People who live in more expensive areas with higher rent and bills will spend more on essential costs, so their discretionary income reduces.
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How to maximize your discretionary income

There are strategies you can use to plan your budget and increase the amount of discretionary income you have available.

• Use budgeting tools to keep track of your expenses - This can help you understand where you are spending money and if there are any areas you could cut back on.
• Find ways to reduce essential costs - Compare costs on things like utilities and insurance to see if you could reduce costs by switching providers. Shop around or switch products at the grocery store, or plan meals in advance to reduce food waste.
• Supplement your income - If you’re able to, consider starting a side hustle or generating passive income, for example, by renting out a room. You could also try negotiating a pay rise with your employer, or working towards a promotion.
• Set clear goals - Having objectives like saving to buy a house, planning to retire early, or saving a certain amount for an emergency fund can give you the motivation to save more of your discretionary income.
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Sources

1. St. Louis Fed, “That Extra Money: A Primer On Discretionary Income” https://www.stlouisfed.org/open-vault/2025/aug/primer-discretionary-income Accessed April 23, 2026
2. Metro Credit Union, “Discretionary Income Vs Disposable Income” https://advice.metrocu.org/money-management/budgeting/article/discretionary-income-vs-disposable-income Accessed April 23, 2026
3. Student Aid, “Income Driven Repayment Plans” https://studentaid.gov/manage-loans/repayment/plans/income-driven Accessed April 23, 2026
4. Student Aid, “Discretionary Income” https://studentaid.gov/help-center/answers/article/discretionary-income Accessed April 23, 2026
5. PNC, “What is Discretionary Income?” https://www.pnc.com/insights/personal-finance/spend/what-is-discretionary-income.html Accessed April 23, 2026

About the author

Becca has over 10 years of experience as a content writer, working across various industries including finance, digital marketing, education, travel, and technology. Her work has been featured in publications including Forbes, Business Insider, AOL, Yahoo, GOBankingRates, and more.