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What is money after expenses called?

Published in Discretionary Income 3 mins read

Money after expenses is commonly referred to as discretionary income.

Discretionary income represents the financial freedom you have after covering your essential costs. It's the portion of your earnings that remains available for non-essential spending, saving, and investing.

Understanding Discretionary Income

Discretionary income is specifically the amount of money you have remaining after you've fulfilled your tax obligations and paid for all personal necessities. These necessities, often termed non-discretionary expenses, include fundamental needs such as:

  • Housing: Rent or mortgage payments, property taxes, utilities.
  • Food: Groceries, essential sustenance.
  • Clothing: Basic apparel for everyday living.
  • Healthcare: Insurance premiums, essential medical costs.
  • Transportation: Costs associated with commuting to work or fulfilling basic needs.

Once these fundamental expenses are covered, along with taxes, any leftover funds are considered discretionary. This money can then be used for leisure activities, entertainment, vacations, luxury goods, or long-term financial goals like retirement savings beyond basic needs.

Discretionary Income vs. Disposable Income

While often confused, discretionary income differs from disposable income:

Feature Disposable Income Discretionary Income
Calculation Gross income minus taxes. Disposable income minus non-discretionary expenses (necessities).
Purpose Available for all spending and saving, essential and non-essential. Available for non-essential spending, saving, and investing.
What it covers Taxes, then necessities, and then wants. Only wants, after necessities are covered.

Disposable income is your income after taxes, but before you pay for rent, food, or other essentials. Discretionary income is what's left after all those essential bills are paid.

Practical Implications of Discretionary Income

Understanding your discretionary income is crucial for personal financial planning.

  • Financial Flexibility: A higher discretionary income indicates greater financial flexibility, allowing for more savings, investments, and quality-of-life improvements.
  • Budgeting: Tracking your discretionary income helps in creating a realistic budget, ensuring you don't overspend on non-essentials.
  • Goal Setting: It provides a clear picture of how much you can allocate towards financial goals like a down payment on a house, a child's education, or retirement.
  • Economic Indicator: On a broader scale, discretionary income is an important economic indicator. When consumers have more discretionary income, they tend to spend more on goods and services, which can stimulate economic growth.

To increase your discretionary income, consider strategies such as:

  1. Reducing Non-Discretionary Expenses: While necessities are unavoidable, finding ways to lower their costs (e.g., finding cheaper housing, optimizing grocery spending) can free up more funds.
  2. Increasing Income: Seeking pay raises, taking on side hustles, or developing new skills can boost your overall earnings.
  3. Wise Spending: Being mindful of how you spend your current discretionary income can prevent financial strain and allow for more significant savings or investments.

By diligently managing your finances and distinguishing between essential and non-essential spending, you can effectively utilize your discretionary income to achieve your personal and financial aspirations.

Learn more about managing your personal finances