What is the difference between disposable income and discretionary income?

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July 2017
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Disposable income is basically after-tax income. That means your gross income, less the amount paid for federal and state income taxes, FICA taxes and local taxes. So if you earn $100,000 per year, and you pay $10,000 in federal income tax, $5,000 in state income tax, and $7,500 in FICA tax, your total taxes are $22,500. That will leave you with a disposable income of $77,500.

Discretionary income also subtracts out your taxes. But it also subtracts necessary living expenses, such as shelter, food, and clothing. So if your disposable income was $77,500, and you paid $20,000 for housing, $10,000 for food, and $2,500 for clothing, your discretionary income would be $45,000. That's the amount of money that you would have available for savings, investments, and luxury spending. The word "discretionary" applies since this is the income that you have greater control over. That is, it isn't committed to mandatory expenses.

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