Disposable personal income is a benchmark that is used to assess aspects of our financial condition, like debt and wealth. What is it? It is gross income, including any transfer payments like Social Security that we receive, less taxes.

Discretionary income is what we have left of disposable income after paying our rent or mortgage, utilities, food and clothing – the essentials. Discretionary implies that we have some choice about whether to spend the money or not. What is discretionary to one person may seem like a necessity to another person. For those of us who are having some financial difficulties, it can be both fruitful and painful to reassess our guidelines for what is a necessity. A cell phone, once regarded as a luxury item, is now considered by many to be a utility like electricity. Is the monthly $100 voice/data plan we are on a necessity or could we get by with a $30 monthly voice plan instead? As I said, these reassessments can be painful.

Some regard a new car every three years a necessity while others view it as a luxury. In any assessment of our personal expenses, it is frightingly easy to lie to ourselves, to convince ourselves that something really is an absolute necessity and to line up several reasons why a particular item is a necessity.

Of the two income benchmarks, disposable personal income (DPI) is easier to measure and to gauge our debt. Household debt, which includes both consumer and residential mortgage debt, was about 80% of disposable personal income during the 1980s and 1990s. Household debt is now 122% of DPI, down from 129%. Americans are saving more but they have quite a ways to go to decrease their debt levels.

Credit Guard has a good guide to personal budgeting.