The Difference Between Disposable Income and Discretionary Income

What you do with your money counts.

Dec 7, 2015 at 11:24PM

In the flow chart of personal finances, disposable income is one step above discretionary income. Disposable income is all the after-tax money you have at your disposal to use (for spending or saving or investing or giving away). Discretionary income -- a subset of disposable income -- is the money you have left after paying for necessities. You can use your discretion in determining what to do with this money.

Knowing the amount of disposable and discretionary income you have is important as you plot your finances, both for the short and long term. The numbers are also important to the overall economy as personal consumption drives the U.S. economy and a rising amount of disposable or discretionary income bodes well for increased personal spending and thus a bolstered economy.

National significance

When the U.S. Department of Labor's Bureau of Labor Statistics puts together its Consumer Expenditure Survey -- which is used by economic policymakers, researchers, and others -- it takes into account money spent on food, housing, apparel, entertainment, healthcare, and other items (necessities and non-necessities).  Information released in September 2015 showed that the average expenditures per "consumer unit," i.e., family, household, or financially independent single person, were $53,495 in 2014, a 4.7% increase from the previous year.

Meanwhile, the U.S. Department of Commerce's Bureau of Economic Analysis compiles data on personal income and expenditures and a metric called personal consumption expenditures (PCE), which it says "accounts for about two-thirds of domestic final spending, and thus ... is the primary engine that drives future economic growth." PCE includes both necessities and non-necessities and includes money spent by individuals, nonprofit institutions that primarily serve individuals, private noninsured welfare funds, and private trust funds.

Personal significance

In your own life, it's important to manage the gap between disposable and discretionary income -- the money you spend on "necessities" -- and to put your discretionary income to use in a way that will benefit you in the long term. Food, shelter, transportation, and healthcare could all be considered necessities, but how much you spend on those will vary from person to person. Going out to eat in expensive restaurants five times a week is much different from buying food in bulk and preparing simple meals at home. Leasing a car is a much different economic proposition from buying one or relying on public transportation.

Each person will make those spending decisions for himself or herself and then decide what to do with the discretionary income left after providing "necessities." If you're planning for your future, saving and investing are two great options for some of this money. Saving won't get you a very big return on your money, but investing in stocks with money you won't need in the next few years could set you up for a more financially secure future, and investing is not just for people with lots of money already. As little as $50 a month can get you on your way. We've got a lot of basics to help get you started here

The next billion-dollar iSecret
The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus. Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us at knowledgecenter@fool.com. Thanks -- and Fool on!

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers