You Say Tomato, I Say Discretionary

How we spend our money, or what we would do if we had more, speaks volumes to marketers. Truth is, however, most spending just covers the basics. What’s left – discretionary income – is what really provides the insight. And, like income before taxes, discretionary income is not distributed equally. In fact, inequality of discretionary income is greater than inequality of before-tax income, but that’s another story.

This chart shows discretionary income by before-tax income group. Discretionary income is what you have left after paying taxes, buying food, clothing, shelter, transportation, and healthcare – minus 25 percent that you spend on your particular “necessities” like tools for work, elective surgery, and reeds for my saxophone. By the way, “food” is food consumed at home, jewelry doesn’t count as clothing, second homes don’t count as shelter, and that flight to Aruba doesn’t count as transportation.

Three points are worth considering: 1) Discretionary income rises with income (duh...), 2) The value (or cost to you) of one discretionary dollar can be calculated “at the margin” or “on average.” (more interesting), and 3) discretionary dollars are expensive (yikes!). In the first place, discretionary dollars begin to appear among households making between $10K and $15K annually. They rise slowly until they get close to the top when they zoom skyward. People who identify with “financial planning” like to say that any dollar you spend should be considered as one times one plus your marginal tax rate. You have to earn X in order to spend Y. However, any dollar you spend “as you choose” (discretionary) could be considered one times before-tax income over discretionary income, on average. For example, say your household brings in $90,000. You have about $33,000 in discretionary spending money. Did you know that each dollar of discretionary spending costs about 2.8 dollars of earned income? Or put differently, you take home 33 cents of a discretionary dollar for each dollar earned. So, in 2015 what should you do with it?

Paying down debt is always a good thing; however, calculating your approximate discretionary income is more fun. (See chart.) In fact, spending money we don’t have (incurring debt), might be avoided altogether if we just knew what was available for discretionary spending. Discretionary income is, technically, money available for “discretionary spending.” Of course, it is also available for saving and investing and, therefore, can affect one’s future standard of living. But that’s another story.

Sources: TGE Demographics Consulting calculated discretionary income at the census tract level based on the Census Bureau’s American Community Survey (five-year data for 2009-2013) and the Bureau of Labor Statistics’ Consumer Expenditure Survey, 2013.

Tom ExterComment