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How Discretionary Income Works

        Money | Taxes

Tracking Discretionary Income and Spending

Tracking your discretionary income can help you make informed decisions about saving and spending, and it assists economic observers in taking the overall economy's temperature. The figures are also important to many businesses. The more discretionary income that people have, the more likely they are to spend some of it. When they do, the money that goes out is called "discretionary spending" [source: Fetto].

For businesses, it's important to know who has discretionary income and who's spending it in order to target marketing efforts to these folks. That means breaking down factors like age, geographic area, socioeconomic background and total income. It also means tracking information about when and where people choose to spend their discretionary funds [source: Inc.].

Consumers over the age of 50, for instance, generally have more income at their disposal than those in other age brackets. However, these people are also more likely to save their cash than others. Teenagers and young adults, on the other hand, generally tend to burn more money on discretionary items and services. That's at least in part because other people – parents, etc. – often cover much of these consumers' non-discretionary costs, like those related to housing and food [source: Inc.].

For many of those young adults, much of that discretionary spending likely goes to education. With college costs skyrocketing, more and more students and their families are turning to student loans to finance their coursework. Believe it or not, a borrower's discretionary income can also determine how much he or she pays back to Uncle Sam each month. Since 2009, federal student loan borrowers in the U.S. have had the option to participate in an income-based repayment program, under which their monthly payments are now capped at 10 percent of their disposable income (15 percent for those taking out loans before July 1, 2014) [source: Slack].