Discretionary income

Discretionary income is a smaller number than the checking balance suggests. On payday the account shows the whole paycheck, but most of it already has a name on it, the rent, the car payment, the insurance, the groceries the household will certainly buy, and only what is left after those is money the month decides about. On $4,400 of take-home pay with $2,915 of essentials, discretionary income is $1,485, about a third of what arrived, and the savings transfer, the extra debt payment and every want come out of that third. It is the figure a month actually runs on, and it changes only when a commitment does.

In a sentence

• "Our discretionary income is $1,485 a month, and $400 of it goes to savings before anything else does."
• "Take-home pay is what arrives; discretionary income is what is left once the essentials are paid."
• "A $1,400 rent on $4,400 of take-home pay is why their discretionary income is small for the salary."

How it's calculated

Discretionary income = take-home pay − essential expenses

1. Start with take-home pay, the amount that reaches the account after taxes and payroll deductions, not the salary.
2. List the essentials, the expenses that would continue if income stopped: rent or the mortgage, utilities and phone, groceries, transport to work, insurance premiums, childcare, and the minimum payment on every debt.
3. Price each essential at the version you would keep in a hard month. The basic grocery run is essential and the specialty items on the same receipt are not; the minimum payment is essential and the extra payment is a choice.
4. Subtract the total from take-home pay. What remains is discretionary income, and it is where savings, extra debt payments, dining, shopping, subscriptions and everything else that involves a choice come from.

A savings transfer sits on the discretionary side of the arithmetic and should be the first claim on the figure. Moving it on payday, before the month can reach it, is what turns a choice into a commitment.

An example

Take-home pay of $4,400 a month.

The household's $400 savings transfer, its $150 extra card payment and its $935 of dining, shopping and subscriptions all fit inside the $1,485, and nothing else does. On the 3rd, with most of the paycheck still in checking, the balance reads as room; the figure says the room was $1,485 on payday and is whatever of that has not yet been spent. The $2,915 is also the amount an emergency fund is sized on and a hard month is lived on, which is why the split is worth getting right rather than reading off the category names.

Why it matters

The discretionary figure is the only part of the month that decisions can touch; the essentials change when a lease, a loan or a policy changes, and not before. The decision it changes is how the discretionary categories are sized, from the figure rather than from the balance, and the mistake it prevents is the most common one in a month that goes over: spending against a checking balance that is mostly rent's neighbors waiting their turn. The share also says where the work is. When the essentials and the bills take more than about two thirds of take-home pay, the month has no slack for a surprise, and the fix lives on the committed side, in a bill, a rate or a subscription, rather than in the dining category.

Discretionary income versus disposable income versus discretionary spending

Disposable income is income after taxes, the economist's term; on a pay stub it is close to take-home pay, which also removes the benefit and retirement deductions. Discretionary income is disposable income after the essentials as well, a smaller figure. And discretionary spending is the part of discretionary income that actually goes to wants, so the two are an amount available and an amount used: the household above had $1,485 of discretionary income, spent $935 of it on wants, and kept $550 as savings and extra debt principal.

Common questions

Is discretionary income the same as disposable income? No. Disposable income is what is left after taxes; discretionary income is what is left after taxes and the essentials. A household can have a large disposable income and almost no discretionary income if the rent and the loans take most of it.

What is a good discretionary income? A share rather than a figure. The committed part of take-home pay, the essentials and the bills with known amounts, commonly runs from half to two thirds; above about two thirds a month has no room for anything unplanned, and below half the flexible categories decide the month. Compare the share with your own last year rather than with anyone else's.

Does a savings transfer come out of discretionary income? Yes, and it should be the first thing that does. A transfer that moves automatically on payday behaves like a commitment; one decided at the end of the month from whatever is left is the first thing the month runs out of.

Are groceries essential or discretionary? The basic grocery run is essential, because a hard month still eats; the specialty items and the wine on the same receipt are discretionary. Sort the amount, not the category name, and the essentials total comes out smaller and more honest.

Is this the discretionary income that student loan payments are based on? No. Income-driven repayment plans use a definition of their own, computed from the tax return rather than from your bills, and the figure they produce is not the household one here.

Go deeper

• Needs versus wants sorts a real month line by line and splits the mixed purchases at the cheaper version's price, so the essentials total is the right one.
• How much of the month is already spoken for adds up every bill with a known amount due this month and reads the committed share against take-home pay.
• The Budget calculator splits monthly take-home pay into needs, wants and savings with the 50/30/20 rule or shares of your own, and shows the dollar amount each bucket gets.

Where it shows up in Zypper

Zypper can show the month with the committed part taken out. Bills in your spending categories count as money already spoken for in the month they are due, at their usual amount, before the charge arrives, and Hide recurring in the budget page's display settings removes recurring payments from the spent figure and the amount committed to bills from the budget, which leaves the discretionary picture; the pace guide is measured against the part of the budget not committed to bills. Above the category list, Left to budget is your expected income minus everything budgeted for spending, which shows before the month starts what the plan has not yet given a job. See Tracking your spending pace and Creating your budget for the details, or get started with Zypper to see your own discretionary picture.