Posted in Marketing and Strategy Terms, Total Reads: 402
Definition: Discretionary Income
Discretionary income can be defined as the amount of an entity’s income left or available for saving after spending for necessities, paying taxes and investing. Discretionary income is different from disposable income. Disposable income for an individual will be his personal income minus personal current taxes and discretionary income can be derived by subtracting all the payments that are necessary to meet his bills from his disposable income.
Knowing the discretionary income of individuals is of crucial importance to both government and different businesses. Businesses are interested in discretionary income levels of individuals to identify consumer segments in various age groups, geographic brackets and their backgrounds so that they can strategize accordingly for their products. The statistics about this income levels of individuals also provide information about spending habits of different consumers which help companies to design their marketing campaigns. Discretionary income levels for individuals fluctuate a lot depending on an economy especially for people with business activities. When the economic output of a country is strong and is doing well, the discretionary income levels also tend to be more than usual.
If the economy is suffering from inflation, then people will have to spend more and thus their discretionary income will fall with keeping in mind the assumption that the wages and taxes remains constant. Discretionary spending also plays a major role in an economy and helps to keep the economy healthy. People will only spend money for luxury items or activities like travel, electronics or movies if they have good discretionary income. If they spend more owing to the high level of discretionary income, they are contributing more towards the GDP of a country. However if some people take loans to purchase luxury items it cannot be considered as having high level of discretionary income and is also not helping the economy of the country.