Consumer discretionary income can basically be defined as any income remaining after all essential expenses have been paid. Essential expenses include taxes, housing, utilities, food and clothing. Businesses are often concerned over how much discretionary income consumers have because this is the money that the consumers have left to purchase non-essential goods and services.
When all sources of income a consumer receives in a given period are added together, this is referred to as gross income. After all federal, state and city taxes are deducted from the total gross income, this is referred to as disposable income. Disposable income can then be defined as any income available for current needs and future investments. Once necessities such as food and shelter are deducted from disposable income, what's left is referred to as discretionary income. Because discretionary income is left over after all bills and expenses are paid, these funds are what consumers have for leisure activities and luxury purchases.
Examples of Discretionary Expenses
Many fail to realize that having a savings account is one example of a discretionary expense. Although saving money might seem to be an essential expense for some, it's actually categorized as an optional discretionary expense. Purchases of designer merchandise such as handbags and accessories are also categorized under discretionary expenses. Other common examples of discretionary expenses include manicures, hair treatments, dining out, going to the movies, attending sporting events, purchasing boats or recreational vehicles, and going on vacation.
Economic Effects on Discretionary Income
The percentage of discretionary income consumers have available is directly linked to the overall health of the economy. When consumers have extra money, they tend to spend more freely. This type of spending tends to have a positive impact on the economy. However, when inflation hits and consumers' necessary expenses increase, this causes discretionary income to be reduced, which results in less free spending. When consumers stop spending, this can have a negative impact on the economy.
Other Factors Impacting Discretionary Income
While most will agree that salary has a large impact on how much discretionary income an individual has, it isn't the only factor to consider. The cost of housing can vary greatly from place to place, and can have a huge impact on discretionary income. Increasing utility and transportation costs associated with the rise in oil prices is another factor, as is the amount of debt the individual has. Debts associated with auto loans, credit cards and student loans have a significant impact on discretionary income.