Discretionary income is a widely used but imprecise definition of that portion of personal income not spent on actual or perceived necessities. Thus discretionary income also includes savings. Perhaps because the definition of “necessities” vary from person to person, the U.S. Census Bureau (which collects such data) and the U.S. Bureau of Labor Statistics (BLS—which publishes the Consumer Expenditure Survey) no longer use the term, but the components from which it can be constructed are available.
Personal income is one of the elements of the Gross Domestic Product and is reported by the Census Bureau at quarterly intervals. Personal income less taxes owed is then defined as disposable income. From this the Bureau deducts personal consumption expenditures, personal (non-mortgage) interest payments, and contributions to derive personal savings. Some portion of consumption expenditures is discretionary; most of it is not; similarly, some contributions such as union fees are not discretionary.
The Census Bureau also conducts a consumer survey that is published by BLS. For the year 2003, the most recent available, housing led consumption expenditures (32.9 percent) followed by transportation (19.1), food (13.1), insurance and pensions (9.9), healthcare (5.9), apparel and services (4.0), and personal care products and services (1.3). Assuming that these categories fall into the rubric of necessities, this suggests that discretionary income in 2003 was 13.8 percent. Categories excluded from necessities were alcoholic beverages, entertainment, reading, education, tobacco, miscellaneous, and cash contributions.
Knowing the pertinent facts about discretionary income is of vital importance to both business and government. Companies are interested in discretionary income levels of consumers in various geographic areas, age brackets, and socioeconomic backgrounds: consumers with larger amounts are more likely to spend their money on the goods and services they provide. The statistics also provide information about consumer spending habits that can be useful in targeting marketing campaigns. Although the data alone cannot predict how a certain consumer will choose to spend his or her discretionary income, it can provide useful information to help marketers make sound planning decisions.
Discretionary incomes of people in certain age groups are of particular value to business and marketing specialists. For example, those over the age of 50 have half of the total amount of discretionary income in their control, making the 50-plus age category the wealthiest group in the nation. This group also corners threequarters of the bank deposits in the nation, and accounts for 80 percent of all savings accounts. In short, the “over 50s” have enormous financial clout. Similarly, teenage and young adult consumers have considerable sums of discretionary income—and are thus highly valued by companies—because they are more likely to have their living costs absorbed by other individuals (typically parents) and they are less likely to be in a position where they have to devote resources to support a family.