Discretionary Income

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The Bottom Line is Discretionary Income

A recent edition of the Washington Post newspaper carried an article about the increase in the number of fixed expenses in the budgets of American consumers.

In the article they recall that a generation, or 20 years ago, the average American monthly budget or cash flow carried fixed expenses for utilities, transportation and a mortgage payment. Now Americans pay an average of twelve bills a month that represent fixed expenses. Every increase in fixed expenses impacts the bottom line of the budget – discretionary or disposable income.

In the article they cite an example – Matt Botwin, a Washington consultant who has a collection of high-tech services including cell phone, satellite radio, and high-speed internet service. Each time a new feature is added to any of these services the monthly fee increases. Botwin is quoted as saying that he is spending $250 a month on these high-tech services but feels he needs them all. Missing from his list is cable TV or satellite TV. Both of these services have increase in cost by leaps and bounds.

In my case, home TV service by satellite has increased from around $20 per month to well over $40 a month and that is without add-on charges for renting movies or special programs. The article cites cable TV service as the initiator of monthly service charges, pointing out that in the 1940s cable TV began offering consumers a better picture by retransmission of local stations. The charge then was less than $5 a month. From this humble beginning a whole new industry of consumer services has developed, most of which have fairly low entry fees that lock-in consumers, get them used to the service, and slowly escalate monthly costs.

The array of such services now is mind boggling, including monthly lease payments for second or third automobiles in a household along with the insurance costs for those, monthly fees for health clubs and/or spas, to the temptation of nightly entertainment from internet-based movie rental services or cable/satellite providers. The article claims the monthly bill for millions of subscribers is well over $100 per month.

Continuing with the notion that many consumers are not aware of how these monthly service fees have eaten away at their monthly discretionary income, the article cites the increase in automatic debiting of credit card accounts as a significant facilitating factor in the trend. Without a doubt it is easier to sell as service to a consumer with the pitch: “You won’t have to do a thing. We will take care of debiting your card automatically every month.”

In a related story in the Wall Street Journal last week, a single woman with three daughters agreed to have a team of three different firms of financial advisers work over her monthly budget. The goal was to find savings so that she would have more disposable income and could save more for college expenses when her daughters (ages 9, 16, and 18) are ready to start. She also wanted to find dollars to build her retirement plan. The financial advisers or planners were able to identify $690 in potential monthly savings. They included in their suggestions a $150 per month savings in monthly service charges for cell phone, lawn and entertainment services.

The insidious increase in the number of monthly service charges, now averaging over twelve per month, and in the dollar impact on discretionary or disposable income has become an issue with economists and academics. They are concerned that the willingness of Americans to give a regular chunk of their monthly paycheck to new conveniences and services is taking a serious bite out of discretionary spending. They know that discretionary spending drives the nation’s economy and that any significant decrease at this time can result in very serious consequences in employment and consumer income.

B.R. Poulton, Ph.D.


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