Discretionary Income

Discretionary income is the amount of spendable income remaining after the purchase of physical necessities, such as food, clothing, and shelter, as well as the payment of taxes. Marketers of goods other than necessities compete for the consumer's discretionary dollars by appealing to various psychological needs, as distinguished from physical needs.
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Definition

Discretionary Income refers to the portion of an individual’s net income that remains after deducting necessary living expenses and taxes. This income is available for spending on non-essential goods and services, savings, or investment. Essential living expenses typically include housing, food, utilities, transportation, and healthcare costs.

Examples

  1. Example 1: Individual Level

    • John earns $50,000 annually. After paying $10,000 in taxes and $30,000 in necessary living expenses, John has $10,000 remaining. This $10,000 is his discretionary income.

  2. Example 2: Household Level

    • A household with an income of $100,000 may allocate $15,000 to taxes and $60,000 to annual living expenses. What’s left, $25,000, is their discretionary income.

  3. Example 3: Marketing Perspective

    • A premium electronics company targets consumers with high discretionary incomes, knowing they are more likely to spend on luxury gadgets beyond their basic needs.

Frequently Asked Questions (FAQs)

Q1: Is discretionary income the same as disposable income?

  • A: No, they are different. Disposable income is the amount of income left after taxes are paid. Discretionary income is what remains after both taxes and necessary living expenses are paid.

Q2: How is discretionary income calculated?

  • A: Discretionary income is calculated by subtracting taxes and mandatory expenses from the total income. The formula is:
    \[ \text{Discretionary Income} = \text{Total Income} - (\text{Taxes} + \text{Living Expenses}) \]

Q3: Why is understanding discretionary income important for marketers?

  • A: Marketers target their products and services toward consumers with higher discretionary incomes, knowing these individuals have more money to spend on non-essential goods.

Q4: How does discretionary income affect an economy?

  • A: Higher discretionary income generally indicates a stronger economy, as consumers are better able to spend on non-essential goods and services, boosting different market sectors.

Q5: Can discretionary income vary throughout one’s life?

  • A: Yes, discretionary income can vary based on life stages, employment status, and changing financial responsibilities.
  • Disposable Income: The amount of money that households have available for spending and saving after income taxes have been accounted for.
  • Net Income: The total earnings of an individual or business after all expenses and taxes have been deducted from gross income.
  • Living Expenses: The routine expenses necessary to maintain a certain standard of living, including food, housing, clothing, and utilities.
  • Consumer Behavior: The study of how individuals select, purchase, use, and dispose of goods and services to satisfy their needs and wants.
  • Psychographic Segmentation: The analysis of consumer lifestyles to create detailed customer profiles based on psychological traits such as activities, interests, and opinions.

Online References

Suggested Books for Further Studies

  • “Rich Dad Poor Dad” by Robert T. Kiyosaki
  • “The Total Money Makeover” by Dave Ramsey
  • “Your Money or Your Life” by Vicki Robin
  • “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko
  • “Personal Finance for Dummies” by Eric Tyson

Fundamentals of Discretionary Income: Personal Finance Basics Quiz

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