Discretionary Income

Discretionary income is what you have left once all the bills you cannot avoid are paid. It is the money you have real choice over.

Start with disposable income, which is income after tax. Then subtract necessities. Suppose your disposable income is 3,800 a month and your essential costs are rent of 1,400, groceries of 500, utilities of 200, transport of 250 and minimum debt payments of 250. Your essentials total 2,600, so your discretionary income is 1,200.

That 1,200 can go towards eating out, holidays, hobbies and new clothes, or towards savings, investments and paying off debt faster. How people use their discretionary income has a large effect on their long-term finances.

Discretionary income is often the first thing to shrink when times are hard. If rent rises by 200 or prices climb, the essentials take a larger share and less is left over. Businesses that sell non-essential goods, such as travel and luxury brands, watch it closely, because their sales depend on how much spare money households have.