Discretionary Income

When we speak of the income of an individual, the two concepts that come to the fore are disposable income and discretionary income. Disposable income is the amount of money that the person can spend after taxes have been cut from this amount. These taxes can be deducted at source or later in the year. On the other hand, discretionary income implies the amount that is left from the disposable income, once expenses related to food, shelter and clothing have been paid off.

Thus it can be said that it is the money that is available to spend once all the essentials and necessities have been purchased by an individual. Hence money that is spent on luxury items, vacations, shopping sprees and other objects all fall under this category, making it much lesser than the gross income.

Implications of Discretionary Income

If the economy of a country sees high levels of discretionary incomes, this means that a lot of people are living with a high standard. If more people are buying luxury items and expensive gadgets, this is a sure sign that the economy on a whole is doing well and prospering. Moreover, in developed countries the rate of fluctuation of this income is quite low, because people are used to living in a certain way. Hence, even in times of economic recession and downturn, people still like to spend money on a lot of luxury items.

Simply knowing what the definition is not enough though, because a study of this concept leads industrialists and marketers to define their strategies. Add to that the fact that it is very difficult to establish at what point a persons expenditure crosses over from essential to luxurious, and this makes this concept a highly theoretical one. For instance, food is categorized as an essential item in this list, but for someone, who is a nonbeliever in financial management and spends all extra income in fancy restaurants, this concept becomes misleading. Additionally, there are certain other areas like education, health care and transportation which are also essential for most people.

For sellers and consumer product manufacturers this income equates to the buying power of customers. They analyze many statistics to determine their sales forecasts and their production strategies, so that there is no excessive or inadequate inventory. Economists claim that investments and savings also count into it, but these should take precedence over say a fancy and expensive indulgence. But the situation gets even more difficult to understand because of the use of credit cards. Since individuals spend more than they make, most of the time, because of credit cards, discretionary income becomes even harder to calculate in such a scenario. Paying off debts as soon as possible is very important as a result of that, and you must understand that it is more important to have higher disposable income than simply earn a higher salary and spend everything on living expenses and bills.

The state of the economy also plays a role in the amount of discretionary income a person has. In times of economic recessions, it will obviously be lower. But when the economy is booming, every person will have a higher percentage to spend. In times of high inflation, the number falls again, and this in turn leads to rising personal debt, which ultimately results in higher levels of national debt as well. Thus there are a number of things that are intermittently linked with its levels, even though this is a concept that has no standardized value and formula to calculate.

Here are some useful statistics, sorted mainly by age and other parameters.

Households with income more than $100,000 per year are only 10% in USA. 70% of it of the country is generated from these households.
Its overall average numbers in the country is around $20,000 per year.
The highest value of total discretionary income was in 1997-98, coming in at $940 billion.
Households headed by people in the age group 50-65 years have 30% of total discretionary income, and the most aggregate.
Households headed by the 35-50 years age group have around 40% of it.

Thus, households whose head is in the age group 35-50 have the most, and this is no surprise since this is the age when working people are at their peak and can make the most money. Additionally, households whose heads have a higher education also earn more income, and thus have a high aggregate of such income, in comparison with a household that is headed by an individual with lesser education. This is also easy to explain.

At the end of the day, it's a figure for expressing the standard of living of an individual in economics, and the overall picture gives an idea about the health of the nations economy as well. Putting this concept into practical use is a rather impossible task.
By Rahul Thadani
Read more at Buzzle: http://www.buzzle.com/articles/discretionary-income.html