discretionary income

n.
Individual income that is not allocated for necessary items such as food and shelter.

The amount of an individual's income that is left for spending after the essentials have been taken care of.

Investopedia Says:
Essentials are things like food, clothing and shelter. Although some might consider chai lattes and the latest agazine to be necessary, they are not essentials.

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Spendable income remaining after the purchase of physical necessities, such as food, clothing, and shelter, as well as the payment of taxes. Marketers of goods other than necessities must compete for the consumer's discretionary dollars by appealing to various psychological needs, as distinguished from physical needs. When the economy weakens, goods normally purchased with discretionary income are the first to show reduced sales volumes. An expensive perfume will not sell during a depressed economic period, but people will continue to buy food and pay rent.

Spendable income remaining after the purchase of physical necessities, such as food, clothing, and shelter, as well as the payment of taxes. Marketers of goods other than necessities must compete for the consumer's discretionary dollars by appealing to various psychological needs, as distinguished from physical needs.

Discretionary income is the amount of income consumers have left over after paying their necessary expenses, such as food, rent or mortgage payments, utilities, and insurance. A similar concept is disposable income, which is the amount of income consumers have left over after paying their taxes. Disposable income is then used to pay necessary expenses. Many consumers do not spend all of their disposable income; instead, they may save or invest some of it. The amount that remains can be spent on luxuries, as opposed to necessities, at the consumers' discretion, and so is known as discretionary income. It is important to note that what qualifies as discretionary income may vary for different individuals and different income levels, as well as over time. For example, a color television set may be a discretionary purchase for a lower-income family, but it may be considered a necessity by a wealthy senior citizen.

The U.S. Bureau of Labor Statistics and the U.S. Census Bureau collaborate to publish ongoing studies of discretionary income and consumer spending. Census Bureau statisticians rank a number of American households according to age, size, and geographic area of residence. They then track the income levels of these households as well as their level of spending in various expense categories, including necessities (such as food, housing, clothing, transportation, and health care) as well as luxuries (such as alcohol, tobacco, entertainment, and education). These studies are used to determine how much money a household typically needs to maintain its standard of living. Many private firms in the country undertake their own studies of discretionary income, but their analyses are also based on the publicly available (online as well as on CD-ROM) census data.

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 because 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 three-quarters 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.

Further Reading:

Niemira, Michael P. "Discretionary Income Growth Booms: The Underpinning for Consumption." Chain Store Age Executive with Shopping Center Age. May 1998.

Russell, Cheryl. The Official Guide to American Incomes: A Comprehensive Look at How Much Americans Have to Spend: With a Special Section on Discretionary Income. New Strategist Publications and Consulting, 1993.

Woodard, Kathy L. "Boomers Lead Boom in Home Re-modeling." Business First-Columbus. April 21, 2000.