Difference between Disposable and Discretionary Income

The health of the financial system has far-reaching implications for people's personal finances and the status of the national economy. Despite the importance of maintaining personal financial management, the great majority of people do not have full control over their own money, both in terms of spending and savings.

When gauging the efficacy of a country's economic resources, the two key metrics used are discretionary and disposable income. They're often used interchangeably, but there are several key differences to keep in mind.

What is Disposable Income?

Once taxes have been taken from an employee's paycheck, the remaining sum is known as take-home pay and can be used however the employee sees fit. A person's disposable income is much higher than their discretionary income since it does not take into account the amount of money spent on needs. One's disposable income is the sum left over after all required tax payments have been deducted from their total income.

Take, for example, a person who makes $200,000 before taxes but has to pay taxes of $60,000 after taxes. This person's disposable income would be $100,000. They will have $140,000 after paying for needs like housing and food that they may put toward other wants.

What is Discretionary Income?

After deducting mandatory expenditures like shelter, food, and clothing from one's salary, the remainder is known as "disposable income." This sum has several potential uses. Once taxes and necessary living expenses have been deducted from a person's take-home pay, that person's remaining disposable income is the amount available for spending.

If a person makes $200,000 before taxes and their tax rate is 30%, they will have $80,000 in discretionary income. The person's disposable income is $140,000, which is the amount of money available to cover basic living expenses other than food and shelter. The person will have $30,000 in discretionary income after spending $110,000 on basics, including housing, food, clothing, and other requirements.

Differences − Disposable Income and Discretionary Income

Both are monitored to get an insight into customer preferences. A person's willingness to spend money affects both of these factors.

The following table highlights how Disposable Income is different from Discretionary Income −

Characteristics	Disposable Income	Discretionary Income
Definition	Disposable income is the amounts of a person's or family's income that is left over after taxes have been taken out.	A person's discretionary income is the amount of money they have left over after paying taxes and meeting their basic needs like housing, food, and clothing. The money can be put away, used, or invested as desired.
Derivation	Disposable income is the amount of income remaining after all taxes have been paid.	Discretionary income is what's left after covering fixed expenses like taxes and mandatory ones like food and shelter.
Percentage of Income	When a person's basic living expenses are not deducted from their income, they have more discretionary funds available to spend on non-essential items.	The sum left over after obligatory payments have been deducted from total income is the individual's discretionary spending budget.
Example	Take, for example, a person who makes $200,000 before taxes but has to pay taxes of $60,000 after tax. This person's disposable income would be $100,000. They will have $140,000 after paying for needs like housing and food that they may put toward other wants.	If a person makes $200,000 before taxes and their tax rate is 30%, they will have $80,000 in discretionary income. The person's disposable income is $140,000, which is the amount of money available to cover basic living expenses other than food and shelter. The person will have $30,000 in discretionary income after spending $110,000 on basics, including housing, food, clothing, and other requirements.

Conclusion

The term "disposable income" is used to describe the amount of money left over after taxes have been taken out of a person's or family's earnings. Discretionary income, on the other hand, is what's left after a person pays their taxes and their fixed costs like housing, food, and clothing. This sum is entirely discretionary and can be used for anything the recipient desires. Knowing the difference between your disposable and discretionary income might help you better manage your personal finances.