Consumer discretionary income is the money consumers can spend on goods and services that they want and do not need. Because it measures available income for spending on goods and services that are not necessary, it enables analysts and others to examine a selected population's spending flexibility. Consumer discretionary income can be employed to analyze an individual household's finances or those of an entire national economy.
A significant portion of a consumer's overall income ultimately is devoted to necessities. They are the expenses that households must absorb to navigate basic daily life, and they reduce consumer discretionary income. These necessary expenses include housing (mortgage or rent), transportation, food, insurance, health care, clothes and household products, such as cleaning supplies and personal hygiene products. The weight of these expenses on a household's budget depends on the household. For instance, a couple with children likely will budget more for necessities such as food and clothing than a couple without kids.
Personal income represents total income before any expenses are withdrawn. Disposable income is the calculation of personal income minus taxes. Disposable income is also sometimes called after-tax income, according to Pitney Bowes. Disposable income can be used in any number of ways, including to purchase goods or services, or to devote to personal savings. When you then subtract necessary costs from disposable income, the resulting total equals consumer discretionary income.
Discretionary expenditures span a wide spectrum. For instance, personal electronic devices, such as computers, TVs and radio/stereo/CD equipment, are generally used for entertainment purposes and considered discretionary purchases, as are luxury items, such as jewelry. Lessons, camps, dues to clubs, toys and vacations are all discretionary costs as well. Some types of discretionary items flirt with necessities. For example, clothing is a necessity, but not all clothing. Luxury apparel, such as an elegant dress or expensive suit, is considered discretionary.
Consumer discretionary income is used to track the financial health of a particular group. For instance, households can use consumer discretionary income calculations in their personal budgeting to determine how much they can afford to spend on discretionary expenses. Businesses utilize consumer discretionary income to analyze their customers' financial status and to gauge how that might impact their bottom lines. Finally, economists, investors and others sometimes look at consumer discretionary income as one of several economic indicators, showing the relative strength or weakness of an economy and the trends that might develop.
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