Discretionary income refers to the spendable income that an individual or household has after accounting for essential expenses such as food, clothing, and shelter, as well as taxes. This income is vital for understanding consumer behavior and is targeted by marketers of non-essential goods and services.
Components of Discretionary Income
Essential Expenses
Essential expenses are the obligatory costs required to maintain basic living standards. This includes:
- Food: Groceries, dining out, basic nutrition.
- Clothing: Daily wear, seasonal clothing, certain work uniforms.
- Shelter: Rent or mortgage payments, home repairs, utility bills.
Taxes
Taxes are mandatory contributions to government revenue. They include:
- Income Tax: A percentage of earnings paid to the government.
- Property Tax: Levies on property ownership.
- Sales Tax: Taxes on purchased goods and services.
Calculation of Discretionary Income
Formally, discretionary income (DI) can be calculated as:
where:
- \( \text{GI} \) is Gross Income,
- \( \text{NE} \) is Necessary Expenses,
- \( \text{T} \) is Taxes.
Importance in Marketing
Discretionary income is crucial for marketers who focus on non-essential goods, such as luxury items, entertainment, and travel. By understanding discretionary income, these marketers can better tailor their products and marketing strategies to appeal to various psychological needs, including:
- Desire for Leisure: Vacations, hobbies, entertainment.
- Status and Prestige: Luxury goods, high-end technology.
- Personal Interests: Niche markets, specialized products.
Economic Significance
Economic Indicators
Discretionary income serves as an indicator of economic health and consumer confidence. Higher discretionary income generally signifies a robust economy, encouraging businesses to invest and expand.
Financial Planning
Individuals use discretionary income to plan for savings, investments, and non-essential purchases. Effective management of discretionary income is key to financial stability and growth.
Historical Context
The concept of discretionary income has evolved alongside economic development. In the pre-industrial era, most income was allocated to essential subsistence needs. However, with industrialization and rising living standards, discretionary income has become a significant component of household budgets.
FAQs
What is the difference between discretionary income and disposable income?
How can discretionary income impact economic growth?
How do marketers target discretionary income?
Related Terms
- Disposable Income: The total income available after taxes.
- Necessities: Essential goods and services required for basic living standards.
- Luxury Goods: High-value items typically purchased with discretionary income.
- Consumer Spending: Expenditure by households on goods and services.
Summary
Discretionary income is the amount of spendable income remaining after essential expenses and taxes. It plays a vital role in consumer behavior and economic growth. Understanding and managing discretionary income is crucial for financial planning, while marketers target this income to promote non-essential goods and services.
References
- Keynes, John Maynard. “The General Theory of Employment, Interest, and Money.” Palgrave Macmillan, 1936.
- Kotler, Philip, and Keller, Kevin Lane. “Marketing Management.” Pearson, 15th Edition, 2016.
- Samuelson, Paul A., and Nordhaus, William D. “Economics.” McGraw-Hill Education, 19th Edition, 2009.
By comprehensively understanding discretionary income, individuals and businesses alike can make informed decisions that enhance financial well-being and economic participation.
