Cut your discretionary spending. If you're serious about budgeting, you've probably heard that advice a hundred times. As long as you're able to spend some of your money on fun stuff — dinners out, movies, vacations — you have discretionary income. Disposable income is separate, so don't confuse the two.
Your disposable income is whatever you have left after you pay state and federal income taxes. In casual use, it means your after-tax income from all sources, less your taxes. When state or federal laws use the term, it's often defined more specifically — for example, as adjusted gross income, plus certain other types of income, minus taxes. In bankruptcy, disposable income and discretionary income are used interchangeably to refer to how much you can spend to pay your creditors.
Discretionary income is the part of your pay you have discretion to spend, invest or save. It includes everything in your paycheck after you subtract living expenses such as your mortgage or rent, food, clothes and medical bills. When you're figuring out a budget, disposable income doesn't tell you how much you can save or where you can trim your spending, whereas discretionary income does. If you have $1,800 discretionary income a month, for instance, that's the place to look for spending cuts.
Unless you get a raise or discover a new tax break, you don't have much ability to change your disposable income. Your discretionary income is much more flexible. Whether you want to save money for a rainy-day fund or increase what you invest in your stock portfolio — or just buy every new video game on the market — it all comes out of discretionary income. When money is tight, you have to actually exercise discretion and choose which spending priorities are most important.
If you can't see anywhere to cut your discretionary spending, look at how you spend your disposable income. What you think of as fixed expenses may be a at least a little discretionary. Shelter and food aren't normally included in discretionary spending, for instance, but if you're renting a luxury condo or eating organic imported truffles every week, you have the option to settle for cheaper alternatives. Go over your fixed expenses and decide if some of them are really discretionary.
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