What it is:
How it works (Example):
Discretionary income is the income remaining after the essentials (taxes, food, clothing, shelter, etc.) have been paid for. Discretionary income is often confused with disposable income -- disposable income is income available after paying taxes. For example:
Gross wages: $90,000
Disposable Income: $70,000
Car Payment: (5,000)
Discretionary Income: $25,000
The disposable income in this example would be $70,000 (or gross wages of $90,000 less the taxes of $20,000).
The discretionary income in this example would be $25,000 (or disposable income of $70,000 less all the necessary and basic living expenses of an individual or family). It is the amount remaining that can be used for non essential purchases, investing, and/or saving.
Why it Matters:
The concept of discretionary income is important on both a micro level and a macro level
In the U.S. economy, powered largely by consumer spending, discretionary income is endlessly tracked, analysed and discussed. In a recession, discretionary spending dries up, and businesses who sell necessities tend to perform better than those that sell luxuries. In a recovery, the relationship is reversed.