Discretionary income is the amount of your net monthly income minus essential expenses. While disposable income is your gross income minus taxes, discretionary income is your net buying power after you have taken care of your personal necessities. Food, shelter and clothing are essential. Many people have trouble defining what is necessary. Luxury items include anything that is not vital for your survival.

In order to account for your discretionary income, it is good to itemize your monthly income and expenses. By paying your bills on a scheduled basis, you will know precisely the amount of your discretionary income. Many people allot for these luxury items and keep a special account for them.

Investing and savings belong in the category of discretionary income. Investing in your future should take precedence over spending money on travel, non-essential services and goods. These categories can be itemized according to priority and discretionary income can be allocated accordingly. Spending money is another consideration.

Increasing personal debt using credit cards is not discretionary income. Using credit cards to purchase luxury and non-essential items is inappropriate to your financial well-being. Essentials must be taken care of first; whatever remains can be prioritized according to your preferences.

As a society, discretionary income levels fluctuate. Many factors contribute to this fluctuation, including business cycles, social and national debt. When an economy’s business is prosperous and economic output is growing or stable at a high level, discretionary income for the society has a tendency to remain elevated.

However, when inflation causes essential expenses to rise, discretionary income drops. This can cause personal debt to increase. When personal debt gets out of control, national debt elevates as well. Items as simple as movies, restaurants and electronics should decline during an economic downturn. Otherwise, personal and national debt will increase.

It is important to maintain your household budget based on discretionary income. Increasing personal debt has no place in a healthy economy. For this reason, the national economic system closely watches the rise and fall of discretionary income and debt and tries to adjust according to the tendencies.

Discretionary income is gross income, minus taxes and essentials. This is an important consideration when applying for a mortgage or other loan. They will use a formula to calculate the ratio of the debt-to-income and based on this number, approve or reject your application.