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What is discretionary spending?
Discretionary spending refers to non-essential items, such as recreation and entertainment, that consumers purchase when they have enough income left over after paying the necessary expenses such as the mortgage and utilities.
There are two main categories of consumer spending: discretionary and staples. Consumer staples include items like food, medication, and personal care and hygiene products; consumer discretionary includes luxury goods, travel, and entertainment. Consumers must sometimes choose between these two types of spending when deciding how to allot their money.
Discretionary spending depends, in part, on disposable income, or how much a person has left after paying for basic and essential expenses. This spending is also influenced by economic conditions, which influence consumer confidence, or how comfortable people feel spending money on non-essential items. If economic conditions seem troubling, consumers might be more likely to save their money and create a financial cushion, even if they have enough money to spend on entertainment and other non-essentials. In a robust economy, however, consumers will feel safer spending on things that they don’t really need.
Some of the businesses vulnerable to consumer confidence, and thus classified as discretionary spending, include leisure-based companies such as hotels and restaurants. Retail would also fall under this category. Economic cycles have a major impact on how well these goods and services sell and how safe people feel spending their money on these types of non-essential expenditures.
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Discretionary spending example
If someone earns $4,000 a month, and her necessary expenses such as utilities, housing and food cost $1,500 a month, then she has $2,500 remaining for discretionary spending. She might spend this money on leisure goods and services such as dining out, going to the movies, or taking vacations, especially if the economy is doing well. If someone earns $2,000 a month and has $1,500 a month in necessary expenses, however, she has only $500 for discretionary spending.