How Discretionary Income Works


Discretionary Income and the Middle Class

For economists, discretionary income and spending are important markers for assessing the overall health of an economy. Gross Domestic Product is one of the leading indicators that investors and economic observers look at to get a snapshot of a country's economic state. GDP is, in effect, a country's national income. It's also used to measure a government's financial stability by comparing the government's debt to the country's overall GDP [source: Thorne].

When they want to look at a particular segment of society, however, economists drill down from a national viewpoint by using data like discretionary income. The middle class has been defined as individuals and households who have a "reasonable amount of discretionary income." What's reasonable, of course, depends largely on whether you live in an impoverished, developing or established country. The main point is that folks in the middle class have enough discretionary money that they don't have to live paycheck to paycheck. They also have some money to spend on non-essentials [source: Parker].

Some theorists argue that middle-class growth — which happens when more people have enough discretionary income to enter the middle class — is a good indicator of overall economic progress. The more money that people have to spend on discretionary goods and services, the more likely they are to spend it, the thinking goes. That, in turn, puts money into other people's pockets and stimulates the economy as a whole.

A strong middle class can also help grow a nation's economy by stimulating investment and business activity. The idea is that more business owners will hang out more "Open" signs when the pot of spending money for which they're competing is larger than when the pot is smaller. In other words, a strong middle class offers stable consumer demand.

Author's Note: How Discretionary Income Works

Since when is whiskey not a necessity? It has, over the years, been used to numb pain, clean open wounds, add flavor to food. It's also been known to lighten the mood. In other words, whiskey makes the world a better place. If that doesn't translate to necessity, than I guess I don't know what "necessity" means.

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Sources

  • Bureau of Labor Statistics. "Personal Income." Dec, 2013 (Nov. 22, 2014) http://www.bls.gov/emp/ep_table_410.htm
  • Credit Guard of America. "A Guide to Personal Budgeting." 2005 (Dec. 4, 2014) http://creditguard.org/wp-content/uploads/2012/11/GUIDE_PERSONAL_BUDGETING.pdf
  • Experian Simmons. "The 2011 Discretionary Spend Report." 2011 (Nov. 22, 2014) http://www.experian.com/assets/simmons-research/white-papers/2011-discretionary-spend-report.pdf
  • Fetto, John. "Understanding Consumers by Discretionary Spend." Experian. May 31, 2011 (Nov. 23, 2014) http://www.experian.com/blogs/marketing-forward/2011/05/31/understanding-consumers-by-discretionary-spend/
  • Inc.com. "Discretionary Income." (Nov. 20, 2014) http://www.inc.com/encyclopedia/discretionary-income.html
  • Landefeld, J. Steven. "GDP and Beyond: Measuring Economic Progress and Sustainability." Survey of Current Business. April 2010 (Nov. 20, 2014) http://www.bea.gov/scb/pdf/2010/04%20April/0410_gpd-beyond.pdf
  • Madland, David. "Growth and the Middle Class." Democracy Journal. Spring 2011 (Nov. 24, 2014) http://www.democracyjournal.org/20/growth-and-the-middle-class.php?page=all
  • Parker, John. "Burgeoning bourgeoisie." The Economist. Feb. 12, 2009 (Nov. 24, 2014) http://www.economist.com/node/13063298
  • Phelps, Glenn. "Worldwide, Median Household Income About $10,000." Gallup. http://www.gallup.com/poll/166211/worldwide-median-household-income-000.aspx
  • Slack, Megan. "Income Based Repayment: Everything You Need to Know." The White House Blog. June 7, 2012 (Nov. 22, 2014) http://www.whitehouse.gov/blog/2012/06/07/income-based-repayment-everything-you-need-know
  • Thorne, Phillip. "FAQ: What is discretionary consumer income (or spending) and where is it reported?" Moody's Analytics. (Nov. 24, 2014) https://www.economy.com/support/blog/buffet.aspx?did=119CD36E-BE39-4801-AAD4-F029985FEBC0

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