Disposable Income vs. Discretionary Income: What's the Difference?
Disposable Income vs. Discretionary Income: An Overview
Disposable income and discretionary income are key economic indicators used to gauge companies' and individuals' financial health.
Individuals and businesses earn income—money for providing goods or services or investing capital in assets like individual retirement accounts (IRAs). Other sources of income include pensions or Social Security. This income may be used to fund day-to-day expenditures and necessities or spend on things people want rather than need.
However, there are subtle differences between disposable income and discretionary income. In this article, we'll discuss those differences and you'll learn how to calculate your discretionary income. If you have a student loan, knowing your discretionary income will help you calculate the repayment of your loan using an income-based repayment plan.
KEY TAKEAWAYS
- Disposable income is the money that is available to invest, save, or spend on necessities and nonessential items after deducting income taxes.
- Discretionary income is what a household or individual has to invest, save, or spend after necessities are paid.
- Examples of necessities include the cost of housing, food, clothing, utilities, and transportation.
- The U.S. Department of Education uses your discretionary income to calculate payments for income-based repayment plans.
- Disposable income is the money that is available to invest, save, or spend on necessities and nonessential items after deducting income taxes.
- Discretionary income is what a household or individual has to invest, save, or spend after necessities are paid.
- Examples of necessities include the cost of housing, food, clothing, utilities, and transportation.
- The U.S. Department of Education uses your discretionary income to calculate payments for income-based repayment plans.
Disposable Income
Disposable income is one of the economic indicators used to analyze the state of the economy. The amount of net income a household or individual has available to them to invest, save, or spend after income taxes. When you receive a paycheck, disposable income is the net amount you receive in their check. Disposable income minus all necessary payments equal discretionary income.
For example, suppose a household has an income of $250,000, and it pays a 37% tax rate. The disposable income of the household is $157,500—that is, $250,000 - ($250,000 x 0.37). Thus, the household has $157,500 to spend on necessities, luxuries, savings, and investments.
Disposable Income and the Stock Market
In the U.S., a large increase in disposable income means an increase in the stock market value, as stock valuation occurs when jobs are plentiful and spending is up. An increase in demand for goods and services means the manufacturing and service industries bump in production and output.
Consumer spending is critical to the health of the stock market and the United States gross domestic product. When disposable income rises, households may decide to invest and save (for instance, in an individual retirement account (IRA) or open a high-interest savings account) or spend on purchases.
When disposable income is down, consumers often spend and invest less, which will impact the stock market. When consumers are forced to become more thrifty, this may lead to a decrease in sales and earnings for corporations and businesses, causing stocks to slump.
Fast Fact
Discretionary income is the money left to spend on luxury items and services, or vacations and other non-essential items.
Discretionary income is the money left to spend on luxury items and services, or vacations and other non-essential items.
Discretionary Income
Discretionary income is the amount of income a household or individual has to invest, save, or spend after taxes and necessities, like student loans or credit card debts, are paid. Discretionary income is derived from disposable income, and therefore there are many similarities between the two income types.
But there is one key difference: Disposable income does not take necessities into account. It simply the funds you have post-taxes to use on both necessities and fun.
Discretionary Expenses vs. Non-Discretionary Expenses
Discretionary income is used to pay for necessities such as rent, loans, clothing, food, bill payments, goods and services, and other typical expenses.
For example, suppose an individual has an income of $100,000 and pays an income tax rate of 35%. The individual has transportation, rent, insurance, food, clothing, and other necessities totaling $35,000 a year. Their discretionary income is $30,000 or the amount left after subtracting taxes and necessities. This is calculated as $100,000 - ($100,000 x 0.35) - $35,000 for the year.
Non-discretionary income would include vacations, investments into retirement accounts, luxury items, or anything good or service that is not necessary, like housing, food, transportation to a job, or medical care. Discretionary expenses in a corporate or small business environment could include health insurance for employees, payroll software, and shipping costs. Non-discretionary costs might include holiday parties or special gifts for customers.
Calculating Discretionary Income for Student Loans
Understanding how your discretionary income impacts any student loan debt can help you take advantage of federal student loan programs such as income-based repayment plans.
Disposable Income vs. Discretionary Income: What's the Difference?
Disposable Income vs. Discretionary Income: An Overview
Disposable income and discretionary income are key economic indicators used to gauge companies' and individuals' financial health.
Individuals and businesses earn income—money for providing goods or services or investing capital in assets like individual retirement accounts (IRAs). Other sources of income include pensions or Social Security. This income may be used to fund day-to-day expenditures and necessities or spend on things people want rather than need.
However, there are subtle differences between disposable income and discretionary income. In this article, we'll discuss those differences and you'll learn how to calculate your discretionary income. If you have a student loan, knowing your discretionary income will help you calculate the repayment of your loan using an income-based repayment plan.
Disposable income and discretionary income are key economic indicators used to gauge companies' and individuals' financial health.
Individuals and businesses earn income—money for providing goods or services or investing capital in assets like individual retirement accounts (IRAs). Other sources of income include pensions or Social Security. This income may be used to fund day-to-day expenditures and necessities or spend on things people want rather than need.
However, there are subtle differences between disposable income and discretionary income. In this article, we'll discuss those differences and you'll learn how to calculate your discretionary income. If you have a student loan, knowing your discretionary income will help you calculate the repayment of your loan using an income-based repayment plan.
KEY TAKEAWAYS
- Disposable income is the money that is available to invest, save, or spend on necessities and nonessential items after deducting income taxes.
- Discretionary income is what a household or individual has to invest, save, or spend after necessities are paid.
- Examples of necessities include the cost of housing, food, clothing, utilities, and transportation.
- The U.S. Department of Education uses your discretionary income to calculate payments for income-based repayment plans.
- Disposable income is the money that is available to invest, save, or spend on necessities and nonessential items after deducting income taxes.
- Discretionary income is what a household or individual has to invest, save, or spend after necessities are paid.
- Examples of necessities include the cost of housing, food, clothing, utilities, and transportation.
- The U.S. Department of Education uses your discretionary income to calculate payments for income-based repayment plans.
Disposable Income
Disposable income is one of the economic indicators used to analyze the state of the economy. The amount of net income a household or individual has available to them to invest, save, or spend after income taxes. When you receive a paycheck, disposable income is the net amount you receive in their check. Disposable income minus all necessary payments equal discretionary income.
For example, suppose a household has an income of $250,000, and it pays a 37% tax rate. The disposable income of the household is $157,500—that is, $250,000 - ($250,000 x 0.37). Thus, the household has $157,500 to spend on necessities, luxuries, savings, and investments.
Disposable income is one of the economic indicators used to analyze the state of the economy. The amount of net income a household or individual has available to them to invest, save, or spend after income taxes. When you receive a paycheck, disposable income is the net amount you receive in their check. Disposable income minus all necessary payments equal discretionary income.
For example, suppose a household has an income of $250,000, and it pays a 37% tax rate. The disposable income of the household is $157,500—that is, $250,000 - ($250,000 x 0.37). Thus, the household has $157,500 to spend on necessities, luxuries, savings, and investments.
Disposable Income and the Stock Market
In the U.S., a large increase in disposable income means an increase in the stock market value, as stock valuation occurs when jobs are plentiful and spending is up. An increase in demand for goods and services means the manufacturing and service industries bump in production and output.
Consumer spending is critical to the health of the stock market and the United States gross domestic product. When disposable income rises, households may decide to invest and save (for instance, in an individual retirement account (IRA) or open a high-interest savings account) or spend on purchases.
When disposable income is down, consumers often spend and invest less, which will impact the stock market. When consumers are forced to become more thrifty, this may lead to a decrease in sales and earnings for corporations and businesses, causing stocks to slump.
In the U.S., a large increase in disposable income means an increase in the stock market value, as stock valuation occurs when jobs are plentiful and spending is up. An increase in demand for goods and services means the manufacturing and service industries bump in production and output.
Consumer spending is critical to the health of the stock market and the United States gross domestic product. When disposable income rises, households may decide to invest and save (for instance, in an individual retirement account (IRA) or open a high-interest savings account) or spend on purchases.
When disposable income is down, consumers often spend and invest less, which will impact the stock market. When consumers are forced to become more thrifty, this may lead to a decrease in sales and earnings for corporations and businesses, causing stocks to slump.
Fast Fact
Discretionary Income
Discretionary income is the amount of income a household or individual has to invest, save, or spend after taxes and necessities, like student loans or credit card debts, are paid. Discretionary income is derived from disposable income, and therefore there are many similarities between the two income types.
But there is one key difference: Disposable income does not take necessities into account. It simply the funds you have post-taxes to use on both necessities and fun.
Discretionary income is the amount of income a household or individual has to invest, save, or spend after taxes and necessities, like student loans or credit card debts, are paid. Discretionary income is derived from disposable income, and therefore there are many similarities between the two income types.
But there is one key difference: Disposable income does not take necessities into account. It simply the funds you have post-taxes to use on both necessities and fun.
Discretionary Expenses vs. Non-Discretionary Expenses
Discretionary income is used to pay for necessities such as rent, loans, clothing, food, bill payments, goods and services, and other typical expenses.
For example, suppose an individual has an income of $100,000 and pays an income tax rate of 35%. The individual has transportation, rent, insurance, food, clothing, and other necessities totaling $35,000 a year. Their discretionary income is $30,000 or the amount left after subtracting taxes and necessities. This is calculated as $100,000 - ($100,000 x 0.35) - $35,000 for the year.
Non-discretionary income would include vacations, investments into retirement accounts, luxury items, or anything good or service that is not necessary, like housing, food, transportation to a job, or medical care. Discretionary expenses in a corporate or small business environment could include health insurance for employees, payroll software, and shipping costs. Non-discretionary costs might include holiday parties or special gifts for customers.
Discretionary income is used to pay for necessities such as rent, loans, clothing, food, bill payments, goods and services, and other typical expenses.
For example, suppose an individual has an income of $100,000 and pays an income tax rate of 35%. The individual has transportation, rent, insurance, food, clothing, and other necessities totaling $35,000 a year. Their discretionary income is $30,000 or the amount left after subtracting taxes and necessities. This is calculated as $100,000 - ($100,000 x 0.35) - $35,000 for the year.
Non-discretionary income would include vacations, investments into retirement accounts, luxury items, or anything good or service that is not necessary, like housing, food, transportation to a job, or medical care. Discretionary expenses in a corporate or small business environment could include health insurance for employees, payroll software, and shipping costs. Non-discretionary costs might include holiday parties or special gifts for customers.
Calculating Discretionary Income for Student Loans
Understanding how your discretionary income impacts any student loan debt can help you take advantage of federal student loan programs such as income-based repayment plans.1
There are four income-based plans offered by the federal government, each with discretionary income requirements. These plans set your student loan payment often below what you would owe on a standard plan. They offer a more affordable option that is based on income and even family size.2 You must meet specific requirements in order to be eligible for these federally income-based repayment plans.
The U.S. Department of Education defines discretionary income as the gross after-tax income for the year minus 150% of the poverty guidelines according to your state and family size.2
Understanding how your discretionary income impacts any student loan debt can help you take advantage of federal student loan programs such as income-based repayment plans.1
There are four income-based plans offered by the federal government, each with discretionary income requirements. These plans set your student loan payment often below what you would owe on a standard plan. They offer a more affordable option that is based on income and even family size.2 You must meet specific requirements in order to be eligible for these federally income-based repayment plans.
The U.S. Department of Education defines discretionary income as the gross after-tax income for the year minus 150% of the poverty guidelines according to your state and family size.2
Revised Pay As You Earn Repayment Plan (REPAYE Plan)
This plan takes into account your discretionary income and allows you to pay approximately 10% of your income to your student loans.
This plan takes into account your discretionary income and allows you to pay approximately 10% of your income to your student loans.
Pay As You Earn Repayment Plan (PAYE Plan)
This plan charges around 10% of your discretionary income (i.e. income after taxes), but never more than the 10-year standard repayment plan amount.
This plan charges around 10% of your discretionary income (i.e. income after taxes), but never more than the 10-year standard repayment plan amount.
Income-Based Repayment Plan (IBR Plan)
This plan accounts for 10% of your discretionary income, but only if you are a new borrower on or after July 1, 2014. Similar to the PAYE plan, you will not be charged more than the 10-year standard repayment plan amount. If you are a new borrower on or after July 1, 2014, the amount goes up to 15% but again, never more than the 10-year standard repayment plan.
This plan accounts for 10% of your discretionary income, but only if you are a new borrower on or after July 1, 2014. Similar to the PAYE plan, you will not be charged more than the 10-year standard repayment plan amount. If you are a new borrower on or after July 1, 2014, the amount goes up to 15% but again, never more than the 10-year standard repayment plan.
Income-Contingent Repayment Plan (ICR Plan)
This plan will charge you a repayment amount in whichever is the lesser amount of 20% of your discretionary income, "or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income."2
In this case, if your discretionary income goes up, so do your loan payments.
The Federal Student Aid website provides a loan simulator tool that is useful if you are trying to decide which repayment plan to use. The page provides a series of questions to get you started on your journey to paying back your student loans.
This plan will charge you a repayment amount in whichever is the lesser amount of 20% of your discretionary income, "or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income."2
In this case, if your discretionary income goes up, so do your loan payments.
The Federal Student Aid website provides a loan simulator tool that is useful if you are trying to decide which repayment plan to use. The page provides a series of questions to get you started on your journey to paying back your student loans.
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