Discretionary income is a person's net revenue minus essential expenses. While "disposable income" refers to gross profits minus taxes, money that is "discretionary" represents the person's net buying power after he or she takes care of personal necessities. Food, shelter, and clothing are essential, for example, while seeing movies and buying electronics are not. Discretionary income is important as it helps gauge the prosperity of a country in general and can be used individually by people to create household budgets.
Identifying What Is Discretionary
People often itemize their monthly wages and expenses in order to determine their discretionary income. By paying bills on a scheduled basis, individuals can more easily predict the amount of money that can be spent on other purchases. Many people allot for these luxury items and keep a special account for them. Individuals who have difficulty paying for their necessities often have little or no discretionary income, since the vast majority of their funds are used to survive.
Uses For This Money
Investing and savings are important uses of discretionary income, since they can generate more money for a person. Experts recommend that investing in the future should take precedence over spending money on travel, non-essential services, and goods. These categories can be itemized according to priority, letting someone more easily allocate money accordingly. "Spending cash" is another aspect of such funds, including any money a person tends to carry around for unexpected expenses.
Changes In Society
As a society, discretionary income levels tend to fluctuate. Many factors contribute to this fluctuation, including business cycles as well as social and national debt. When a country's economy is prosperous and economic output grows or remains stable at a high level, non-essential spending for its citizens tends to be elevated.
When inflation causes essential expenses to rise, however, the amount of money that people have for luxury items drops. This can create further problems, because people with less money to spend often forego luxuries like movies or expensive electronics. Declining sales can then result in less income for more people or job loss, which continues a cycle of economic downturn. This is why overall discretionary funds in a country are important, because such spending can have a tremendous impact on the economy in general.
Organizing Household Budgets
Most financial experts emphasize the importance of maintaining a household budget based on discretionary income. Financial planners often suggest identifying all regular, essential expenses so that people can easily see just how much money they have to spend on luxuries each month. Many banks and lending organizations consider household budgets and earnings when someone applies for a mortgage or other loan. The financial organization that is considering lending the money often uses a formula to calculate the ratio of the debt-to-income for an applicant; based on this number, the group then decides to approve or reject the application.