Knowing the amount of your disposable income and discretionary income allows you to have better control of your finances. Disposable and discretionary income are two different economic indicators used to measure the health of an economy, based on how much a person spends.
How to Define Disposable Income
The main difference between disposable and discretionary income is that while disposable income refers to the money left after taxes, the discretionary income is the amount left to invest, save or spend after taxes and necessities.
When you receive your salary, part of your money goes to pay federal, state and local taxes. What is left is considered the disposable income and is also known as your net income. That’s how you define disposable income and it’s also essential to the economy since it will establish how much someone will spend on goods and services.
You can use you or your family's own earnings as disposable income examples. If your gross income is $90,000 and you pay $20,000 in taxes, that means that the disposable income is $70,000.
How to Define Discretionary Income
After you pay your fixed expenses, for example, rent or mortgage, electricity, internet and food, the money you have left is your discretionary income.
For example, if your income after taxes is $5,000 and you spend $1,000 on rent, $500 on utilities such as internet and electricity and $300 on groceries, that means that your discretionary income is $3,700.
Disposable Wage Garnishment and Income
Understanding the difference between disposable and discretionary income helps you to manage your finances and lower the risks of having your paychecks garnished. Garnishment takes place after a court decision and your employer is responsible for withholding a portion of your salary to pay your debts. According to an ADP study, 7 percent of people in the U.S. in 2017 had their wages garnished.
Currently, if your disposable income is above $290, the court allows up to 25 percent to be garnished or any amount above 30 times the minimum wage.
According to federal law, you can’t be fired because your wages have been garnished once. However, if more than one creditor has garnished your income, your job may be at risk.
Wage Garnishment and the IRS
The IRS must send a wage levy notice to the company, which, in turn, must give a copy to the employee, The documents include an exemption claim form that the employee has to fill in and return.
- CNN: What to do if your wages are garnished
- Nolo: If Your Wages Are Garnished: Your Rights
- Debt: Losing important income from defaulted student loans.
- Treasury: Administrative Wage Garnishment (AWG)
- Market Wired: One in 14 U.S. Workers are Having Their Wages Garnished with Child Support and Student Loans as Leading Causes, According to New ADP Research
- Recommended Personal Budget Ratios
- What Is Disposable Income in a Personal Income Statement?
- Reason For Budgeting
- How to Manage Household Finances
- Steps to Create a Cash Budget
- Preparation of a Flexible Budget
- How to Budget for a Low Income Individual
- What Percent of Your Take-Home Pay Should Be Discretionary Income?