what is discretionary income 
discretionary income is the amount of an individual s income that is left for spending investing or saving after paying taxes and paying for personal necessities such as food shelter and clothing discretionary income includes money spent on luxury items vacations and nonessential goods and services because discretionary income is the first to shrink amid a job loss or pay reduction businesses that sell discretionary goods tend to suffer the most during economic downturns and recessions understanding discretionary incomediscretionary spending is an important part of a healthy economy people only spend money on things like travel movies and consumer electronics if they have the funds to do so some people use credit cards to purchase discretionary goods but increasing personal debt is not the same as having a discretionary income discretionary income vs disposable incomediscretionary income and disposable income are terms often used interchangeably but they refer to different types of income discretionary income is derived from disposable income which equals gross income minus taxes disposable income in other words is a person s take home pay used to meet both essential and nonessential expenses this income is what is left over after taxes and it is the amount of net income available to spend save or invest discretionary income is what is leftover from disposable income after the income earner pays for rent mortgage transportation food utilities insurance and other essential costs out of their disposable income for most consumers discretionary income gets depleted first when a pay cut happens an example is if a person makes 4 000 per month after taxes and has 2 000 in essential costs they have 2 000 in monthly discretionary income if their paycheck gets cut to 3 000 per month they can still meet their essential costs but only has 1 000 leftover in discretionary income discretionary income and the economydiscretionary income is an important marker of economic health economists use it along with disposable income to derive other important economic ratios such as the marginal propensity to consume mpc marginal propensity to save mps and consumer leverage ratios in 2005 in the midst of a debt fueled economic bubble the u s personal savings rate went negative for four consecutive months after paying for necessary expenses out of disposable income the average consumer spent all of their discretionary income and then some using credit cards and other debt instruments to make additional discretionary purchases beyond what they could afford in 2020 during the covid 19 pandemic and the widespread lockdowns that resulted the personal savings rate reached all time highs in the u s of more than 30 for several months from the end of 2021 into 2022 the rate has moderated to around 7 more in line with the long term average 1aggregate discretionary income levels for an economy fluctuate over time typically in line with business cycle activity when economic output is strong as measured by the gross domestic product gdp or another gross measure discretionary income levels tend to be high as well if inflation occurs in the price of life s necessities then discretionary income falls assuming that wages and taxes remain relatively constant 