Pop quiz! What’s the difference between Disposable Income and Discretionary Income?
A. Disposable Income is all income leftover after taxes, while Discretionary Income is income leftover after taxes AND living expenses.
B. Discretionary Income is all income leftover after taxes, while Disposable Income is income leftover after taxes AND living expenses.
C. Trick question. The terms are interchangeable.
The answer is A, but if you guessed B or C, don’t worry you aren’t alone. A lot of people think disposable income is any money left over after the bills are paid. But this is actually discretionary income.
Okay, so what?
So the issue here is how society has flipped the meaning of these terms. Let’s look at how Oxford defines these words via a Google search:
Okay, stick with me on this. Disposable income is labeled this way because after taxes, your income is disposed through bills, food, rent, and any other expenses. You use it once and it’s gone.
Discretionary income is labeled this way because after all of your bills are paid, any money that is left over can be spent at your discretion.
Makes sense, right?
However, at some point society stopped using disposable income correctly and rather made it a synonym for discretionary income. By doing so, society also changed the context of the word disposable.
Thinking of disposable income as income that exists after taxes and living expenses implies that the rest of your income should be disposed at the end of each month.
Oh look! I’ve got $200 of disposable income. I think I’ll go on Amazon and see how I can treat myself…
Society has made it “normal” to spend any money we have leftover at the end of the month or use an unexpected bonus the moment the check is deposited. We do this because it’s ingrained in us that money is disposable.
But remember the definition of disposable:
“Intended to be used once…and then thrown away.”
And that’s exactly what we do with our money. We throw it away on material items that we don’t actually need. We spend money because we have money. And society tells us this is what we’re supposed to do.
Society is telling me to do this!
But if we revert back to thinking of this money as discretionary income, we can change our mindset of how it should be used. It’s up to our discretion. We could spend it on material goods, or maybe we could invest it in an index fund and let our money make more money for us.
The point is not to be a zombie when it comes to spending. Just because society thinks all extra income is disposable doesn’t mean you have to think that way too. You work hard for your money. Use discretion when it comes to saving and spending it!
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