What is the Difference Between Disposable and Discretionary Income?

The main difference between disposable and discretionary income lies in what they represent and how they can be used. Here are the key distinctions:

• Disposable Income: This is the amount of money an individual has left after paying income taxes. It represents the individual's net income or take-home pay, which can be used for any expenses, including necessary living expenses and discretionary spending.
• Discretionary Income: This is the money an individual has left over after paying income taxes and other necessary living expenses, such as rent or mortgage, food, utilities, and transportation. Discretionary income can be used for nonessential items and services, like vacations, dining out, or entertainment.

In summary, disposable income refers to the total income available for spending and saving after taxes have been deducted, while discretionary income represents the portion of income remaining after paying for taxes and essential living expenses. Discretionary income is what individuals and families have to invest, save, or spend on nonessential items and services after taxes and necessities are paid.

Comparative Table: Disposable vs Discretionary Income

Here is a table comparing disposable and discretionary income:

Key differences between disposable and discretionary income include:

• Disposable income is the money left after paying taxes and does not factor in essential living expenses.
• Discretionary income is the money left after paying taxes and essential living expenses.
• Disposable income can be used for necessities, savings, investments, and nonessential items or services.
• Discretionary income can be used for vacations, luxury items, or other nonessential goods or services, and plays a role in determining monthly federal student loan payments under income-driven repayment plans.