One Stop Mortgage Corp Blog

Why the Definition of Discretionary vs. Disposable Income Doesn’t Actually Matter

June 17, 2016

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Home Renovations

Whenever a traditional statement or phrase undergoes a structural shift in how it’s presented, I automatically lend a curious ear.

When I was in high school, we were often taught about the value of disposable income. Depending on the type of job, let’s say Job X, you secured after university, you were likely to have X amount of disposable income. With Job Y, Y disposable income would be guaranteed. Make sense?

Yeah, it barely made sense then either. We were told to set our sights on the amount of money we’d be able to throw away at the end of the day and then fill in the career blanks afterward.

Discretionary income essentially uses the same meaning as disposable income. It’s the amount of money we have to spend after paying for necessities such as food, shelter, and clothing. It’s what we spend on vehicles. Furniture. Restaurants. The problem with disposable income is that it paints people into a corner. We live in one of the most beautiful places on Earth - the income we spend on exploring the mountains or the ocean isn’t disposable. It’s not as if we were ever throwing this money away.

Disposable income adds savings to one’s consumption expenses, while discretionary income omits savings and payments such as mortgages, utilities, insurance, and transportation.

Check out this discretionary income calculator (which actually follows the rules of disposable income).

The problem I’ve always had with disposable income is that it’s difficult to define the line between necessity and luxury. Food is a necessity, but food at a restaurant?

In any event, the formal definitions of disposable income vs discretionary income are fully understood by your accountants and anyone you trust with your investments, like your mortgage brokers!

Financial Responsibility

Since graduating from high school, I’ve invested great effort to find an enjoyable career. I studied hard in university and I took the right steps to get where I am today. No, I’m not done yet, but I’ve come this far without worrying too much about the paycheque at the end of the day. Obviously that’s a pretty big piece of the puzzle, but the amount I spend on everything, from the size of my home to the food I consume to the entertainment I subject myself to, is discretionary, in my mind. There are things you need to pay for, so I suppose there’s still a place for disposable income, but you’re free to live your life in whatever way you see fit.

Discretionary income relates more to the standard of living with which you’re comfortable. We all run into situations in our lives where we struggle to meet that standard, but in those cases, it’s up to our discretion to either redefine that standard or take the steps necessary to get back to, or exceed, where you were before.

Life can get in the way of living sometimes. Good thing it’s within our power to make positive choices to point that life in the right direction.

Learn more about disposable income vs discretionary income.

 

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