Definition of Discretionary Buying Power

Global companies spent $324 billion on TV ads in 2011, according to Nielsen.

Global companies spent $324 billion on TV ads in 2011, according to Nielsen.

Discretionary buying power measures the level of free spending cash you have after you pay all taxes, debt obligations and other expenses. People with a relatively high amount of discretionary buying power are popular targets of marketers who sell luxury goods. They are also beings that we all aspire to be. A high overall level of consumer discretionary buying power is important to economic health in the United States, but most people don't care whether their discretionary buying power is patriotic or not -- they just want enough luxury cash to buy a spiffy new car or a hot new purse. Or to bulk up their retirement account.

Budget Basics

Each month, a portion of your income routinely goes to pay standard debt payments and other living expenses such as utilities, groceries and household items. This is after your employer takes taxes out of your gross income. These routine monthly expenses and purchases are considered part of your basic expense budget. Whatever you have remaining after predetermined commitments is your discretionary income. If you have a net income of $5,000 and regular expenses of $3,500, you have a relatively strong discretionary income of $1,500.

Save or Spend

The $1,500 you have in extra money presents a nice dilemma. Some diligent, long-term planners prefer to set aside most or all of their discretionary money in rainy-day funds, savings accounts, retirement funds or long-term investments. Other people have a "live for the here and now mentality" and opt to spend all of their extra money aside from a little savings for emergencies. Marketers of products and services much prefer this mentality since it opens the door for additional sales.

Marketing Effects

American companies account for a large portion of global advertising expenditures. In the fourth quarter of 2011, American companies spent $31 billion of the $131 billion spent globally on ads, according to Nielsen Holdings. Factors such as high discretionary income, lots of market competition, rampant media channels and a consumer-driven buy now, pay later mentality all contribute to this fact. The marketers that sell non-essential items such as vacation packages, jewelry, luxury cars, high-end furniture and decor and artwork all benefit from a high level of discretionary buyer power. When consumer confidence and discretionary buying levels are high, consumers look more to higher-end items, which leads to increased efforts by marketers to attract these buyers.

Economic Effects

About 70 percent of the U.S. economy is driven by consumer spending, according to ABC News. When people spend money with less inhibition, retailers flourish, which means manufacturers and suppliers also do better. This prompts these businesses to expand and add jobs, which adds to the level of consumer buying power. These effects are cyclical. Similarly, when unemployment is high, consumers have less money to spend, which means retailers and other businesses struggle. At the extreme, limited discretionary buying power leads to sluggish economies, recessions or even depressions.


About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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