Household income is not a good measurement of discretionary income

dollar bills with scrabble pieces on top that spell "spend"
Photo from Flickr: 401 (K) 2013

This month, the U.S. Census Bureau’s American housing survey will begin. As part of this survey, census workers will be collecting demographic data including household income.

Household income is a staple in marketing for selecting areas where people are most likely to purchase products or services as well as other uses. For example, if you own a luxury car dealership, you probably want your dealership located in or near an area with a high household income.

Although household income is a quick way to assess an area, it doesn’t really tell the whole story. Consumer discretionary income can vary significantly based on a wide variety of factors that are unmeasured by the simple household income measurement.

Consider the following examples:

Example 1: Number of people in the household factors greatly in the amount of discretionary income

Household 1 has a household income of $75,000. The house consists of a husband and a wife, two children, and a live-in mother-in-law.

Household 2 also has a household income of $75,000. The house consists of a single female with no dependents.

Example 2: Other monetary factors such as debt play a huge role

Household 1 has a household income of $75,000 and consists of a young married couple. They have no debt.

Household 2 also has a household income of $75,000 and consists of a married couple. One attended a private college and now has student loans plus other debts (car, credit card, etc.) totaling $150,000.

Example 3: Cost of living is a major factor

Household 1 has a household income of $75,000 and consists of a retired couple. They live in Kalamazoo, Michigan.

Household 2 also has a household income of $75,000 and consists of a retired couple. They live in Chicago, IL.

According to CNN’s cost of living calculator, the equivalent of $75,000 in Kalamazoo is $98,539 in Chicago.

In each of the examples above, do we really expect household 1 and household 2 to have the same amount of discretionary income available? It just isn’t the reality. There are additional factors that, coupled with household income, can give us a clearer picture. But then, of course, there are behavioral factors to consider. My point is, household income is a start, but the only way to get a true picture of discretionary income is in-depth market research.

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