Discretionary income is the money you have left after you pay for essentials, like housing.
You can use discretionary income to build a budget with the 50/30/20 strategy.
The federal government uses a discretionary spending formula to set your student loan repayment amount under income-driven repayment programs.
Discretionary income is the amount of money you have left after paying for necessary expenses, like taxes, housing and food. You use discretionary income for "extra" things, like entertainment, savings and investments.
Depending on the purpose, discretionary income may be calculated in different ways.
How discretionary income is used
Building a budget typically involves listing out your income and expenses and creating a spending-and-savings plan around your discretionary income.
First, you need to understand which expenses are essential, or nondiscretionary, to ensure you cover those each month. These usually include housing, utilities, groceries, gas and other fixed bills. Then, you can divide what you have left over — your discretionary income — based on a budgeting method.
We like the 50/30/20 budget.
With this strategy, you aim to limit nondiscretionary spending to 50% of your income. For your discretionary income, use 30% for lifestyle expenses, like travel, restaurants and cable TV, and 20% to grow your savings or more quickly pay down debt. If 20% isn't adequate to reach these goals, you move money out of the 30% lifestyle column.
Student loan repayment plans
For federal loans, the U.S. Department of Education uses a discretionary income total to determine your bill for income-driven repayment plans. These plans can help lower your payment if you’re struggling to make ends meet.
For the Income-Contingent Repayment Plan, your discretionary income is the difference between your yearly adjusted gross income, or AGI, and the poverty line for your family size and state. For other plans, discretionary income is calculated by deducting 150% of the poverty line amount from your AGI.
You can find your AGI on your most recent tax return. For 2019, it’s located on line 8b of IRS Form 1040.
Income-driven repayment plans cap your monthly payment from 10% to 20% of your discretionary income. Use a discretionary income calculator to see what your payments could look like — including a $0 payment if your AGI is low enough.