discretionary income
Money remaining after taxes and essential living expenses — free to spend or save as you choose.
Example
“She used discretionary income to invest in index funds each month.”
Memory Tip
DISCRETION — spend it however you choose. Guard it carefully.
Why It Matters
Discretionary income determines your financial flexibility and ability to pursue goals beyond survival. Understanding this amount helps you build savings, invest for the future, and make intentional choices about lifestyle spending rather than living paycheck to paycheck.
Common Misconception
Many people believe discretionary income means money they can spend guilt-free on anything they want. In reality, it still requires careful planning since this is also the pool you should draw from for emergency savings, retirement contributions, and debt repayment.
In Practice
If you earn 5,000 dollars monthly with 1,200 dollars in taxes and 2,500 dollars in essential expenses like rent, utilities, and groceries, you have 1,300 dollars in discretionary income. You could allocate 500 dollars to savings, 400 dollars to investment accounts, and 400 dollars for entertainment and dining out.
Etymology
From Latin 'discretio' meaning judgment — income you use at your own discretion.
Common Misspellings
Build a budget and track your spending
Related Terms
More in personal finance
Other personal finance terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.