Find The Best Insurance
We make it easy to compare and buy insurance.LEARN MORE
This measure of personal income shows how much you can spend on nonessential expenses.
Discretionary income is money leftover after paying for necessary expenses
Necessary expenses include taxes, food, and shelter
Student loan payments for an income-based repayment (IBR) plan are based on discretionary income
You might have lower monthly payments with this type of repayment plan
Discretionary income is the money you have leftover after taking care of any necessary expenses, like food, shelter, and taxes. Discretionary income is what you spend on nonessential things — like going on vacation, seeing a movie, as well as investing or saving.
If you have student loans, discretionary income is also an important figure for determining the monthly payments for an income-based repayment plan.
In this article:
Discretionary income is the money you have left over after taking care of any required costs.
Discretionary income is what remains after you pay:
The remaining income can be used however you want. Examples of discretionary income would be money spent on:
Disposable and discretionary income are two different things. Disposable income is simply your after-tax income. While discretionary income also accounts for taxes, it goes a step further and factors in the other necessary costs. Discretionary income will be less than disposable income.
Discretionary income = disposable income - necessities
Neither of these types of income necessarily constitute take-home pay, which is the actual amount you receive from your paycheck. It can be the same as disposable income, but it might also include deductions for retirement accounts, insurance, and other workplace benefits.
It’s important to have an emergency fund to cover your expenses when something unexpected happens and also to have money saved for retirement. You might have noticed that money for saving and investing comes from your discretionary income.
If you find that you don’t have enough money to spare towards saving and investing, you might need to increase your discretionary income. You can do this by trying to lower the cost of your necessary expenses. For example, you might try to lower your mortgage payments or find a cheaper apartment, or shop around for better homeowners insurance rates. (If you’re looking for the best life insurance rates, Policygenius can help you get free quotes.)
Policygenius' partner Fiona lets you compare savings accounts to find the highest APYs in the industry.
If you’re having trouble repaying your federal student loan, you may be able to lower your monthly payment with an income-driven repayment plan (IDR).
Two popular types of IDRs are the income-based repayment plan , which sets your payment amount to 10% to 15% of your discretionary income, and the income-contingent plan, which sets your payment to 20% of your discretionary income. If your income is low enough, then you potentially may pay as little $0.
The Department of Education sets their own definition for discretionary income using a formula based on the federal poverty guidelines. Discretionary income is calculated as either 150% or 100% of the federal poverty guideline subtracted from your income, for an income-based or income-contingent repayment plan respectively.
We’ll go through an example for the income-based repayment plan with this formula:
Discretionary income = adjusted gross income - 150% of the poverty guideline
The poverty guidelines change depending on the size of your family household. The income is your adjusted gross income, which you can find on your tax return. It is your gross income after you account for any possible tax deductions, like retirement plan contributions or student loan interest payments.
As of 2019, the federal poverty guidelines are:
|Household size||48 contiguous states + D.C.||Alaska||Hawaii|
As an example, let’s say your adjusted gross income (AGI) is $40,000 and you are the only person in your household in California:
With an income-based repayment plan, your new loan payments will range from 10% to 15% of your discretionary income, which is $177 to $266 a month in this example.
Your loan servicer may not offer an income-based repayment plan if you have a private student loan. But if you are having trouble making your payments, there are still other repayment options available to you, including debt consolidation. If you have multiple student loans, you can bundle the debt into one-single payment. This might come with lower interest rates, but can potentially lengthen the loan term.
Under certain circumstances — graduate school, military deployment, financial hardship, for example — you might qualify for deferment or forbearance, which allows you to postpone or reduce payments.
Finally, if you’re eligible for loan forgiveness, the government can effectively cancel your loan and you will no longer have to make payments.
Having a savings account is half of the financial protection battle. Life insurance is the other half.
Policygenius can help you find a life insurance policy to protect your loved ones.
Policygenius’ editorial content is not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.
This post contains references to products or services from one or more of Policygenius' advertisers or partners. While these codes earn us a small fee at no additional cost to you, they do not influence editorial content and we only refer products we love.
Was this article helpful?
Security you can trust
Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
Copyright Policygenius © 2014-2019