What Are Discretionary Expenses? A Complete Guide

When it comes to spending money, there are the needs in life, and then there are the wants. Discretionary expenses are those wants: non-essential outlays of cash that pay for things that are not essential. Think of upgrading to a new phone because the camera is cooler on the latest model or deciding to head to the beach for a long weekend.

Digging into the difference between discretionary and essential spending can help you understand and optimize your spending and your budgeting.

Because discretionary expenses are unnecessary, they can be a good place to trim one’s budget and find more funds to use elsewhere. Learn more about these costs and how to manage them.

What Is the Definition of a Discretionary Expense?

To understand what is a discretionary expense, first consider what essential spending is. For example, housing expenses, like mortgage payments or rent, are things a person can’t do without. Shelling out for food, fuel, taxes, and minimum debt payments are other examples of spending that’s essential.

Some of these necessary expenses will still be variable, changing every month. For example, an electricity bill may go up and down depending on how much time is spent at home and the season of the year.

However, the wants of life (or what some people may call the fun stuff) are those expenses paid from your discretionary or disposable income. They reflect the goods and services that may not be vital for survival but that people frequently spend money on.

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Discretionary vs Non-Discretionary Expenses: What’s the Difference?

Any expenses beyond core costs are considered discretionary; it’s a matter of needs vs. wants. Typically, discretionary costs reflect wants. They aren’t needed for a person to function in day-to-day life. Rather, they have more to do with lifestyle.

Broadly, discretionary expenses could include vacations, entertainment, luxury items, eating out in restaurants, and electronic gadgets.

Exactly what constitutes a discretionary expense can be subjective.

•  While food is generally thought of as a necessary expense, some types of eating are actually discretionary. Eating at restaurants is avoidable and often more expensive than making food at home. Buying luxury ingredients at the grocery store (ahem, imported cheeses) can be more costly than sticking to pantry staples.

•  Similarly, clothing, in many instances, is a necessary expense. If a person lives in a cold climate, owning an insulated winter coat is a legitimate need. (Without one, the person could risk their health or well-being).

Still, there’s tons of variation in the price of winter coats. Choosing to buy a utilitarian coat often costs much less than buying a designer jacket.

Even within the categories of essential expenses, individuals can exercise their discretion to spend wisely and keep the money in their savings account growing.

4 Common Examples of Discretionary Expenses

Here’s a list of some common types of discretionary expenses to consider. You might wind up cutting non-essential spending to free up money for other purposes.

1. Entertainment and Hobbies

Concerts, movies, comedy shows, and plays can be wonderful experiences. Though you may argue that Taylor Swift or Beyoncé tickets are necessary for survival, these are discretionary spending in truth. The same holds true for pursuing hobbies, such as spending a bundle on rock-climbing classes or booking a cycling trip through Europe. Practically speaking, you could stay fit by, say, running on a local trail or working out at home.

2. Dining Out and Travel

Your everyday meals are a necessity, but when you grab a pricey green juice to go, take a seat at the sushi bar, or join friends for drinks on a Friday, those are discretionary expenses. Also, while the “I need a vacation” sentiment can run strong, taking a trip is considered a discretionary expense.

3. Upgrades and Luxury Goods

As noted above, snagging the latest phone or laptop because it has cool new features is not a necessity. It could be considered FOMO spending. Also, buying luxury goods and services, such as a pricey wrist watch or expensive haircut, qualify as discretionary expenses.

4. Subscriptions and Memberships

Do you have wonderful things turn up on your doorstep regularly as part of a subscription? Whether makeup samples or snacks of the world, these don’t count as needs but wants. Similarly, if you spend money on memberships, such as at a yoga studio, that is not considered essential spending.

How to Budget for Discretionary Spending

Tracking discretionary expenses is key in case times get tough or a person wants to make a budget or tighten theirs up. When planning for financial goals, like saving up for a mortgage down payment, finding places to pare back can add up.

Tracking discretionary expenses can help with making or paring back budgets.

One of the most important strategies for tracking discretionary spending is creating a household budget. Budgeting may help individuals to ensure there’s enough money to cover necessary expenses and bills. Once those needs are covered, it’s possible then to set the remaining money aside for discretionary spending.

Step 1: Calculate Your Discretionary Income

To start building a monthly household budget, tally up total monthly income after taxes. Be sure to include all sources of income, such as:

•  Salary

•  Any money made from freelance or side hustle gigs

•  Passive earnings, such as rental property income or dividends.

Then, you will allocate this amount of money to cover your needs, wants, and saving goals.

Step 2: Choose a Budgeting Method That Fits Your Style

There are a variety of different budgeting methods. Some are particularly suited to tracking monthly spending. Here’s a look at common budgeting strategies:

The 50/30/20 Rule: The 50/30/20 budget rule was popularized by Elizabeth Warren and her daughter Amelia Warren Tyagi in their book All Your Worth. The idea behind this strategy is that monthly income is divided proportionally between three categories:

•  50% goes to essentials, or needs

•  30% goes to discretionary spending, or wants

•  20% goes to savings.

This strategy prioritizes savings, removing it from the category of discretionary spending and making sure it’s part of every month’s budget. This budgeting strategy takes a broad view and can be good for people who are easily overwhelmed by tracking details.

Use an online 50/30/20 calculator to get a quick look at how your income falls into the three categories.

Line-item Budgeting: For those who love to dive into the nitty-gritty details of spending habits, line-item budgeting might be a better fit. Line-item budgeting can involve breaking out a spreadsheet, examining expenses in fine-toothed detail.

For example, rather than simply having a broad category for all groceries, a line-item budget could break down how much gets spent on buying meat, vegetables, dairy, bread, prepared foods, and coffee. Naturally, the more details that are tracked, the more information a budgeter has on exactly where their money is going.

There may even be pockets of “essential” spending — for instance, the types of groceries being bought — that could be pared back. Rather than helping a person to allocate funds, a line-item budget focuses on tracking spending.

Envelope Budgeting: In envelope budgeting, a person writes down their discretionary spending categories on individual paper envelopes. Next, they decide how much they’re willing to spend in each category and place that amount of cash in each envelope. The idea is to train oneself to avoid using debt or credit cards, which can encourage impulse spending.

And here’s the rub: Once the cash within a given envelope has run out, it’s gone. You could borrow from another envelope if that has some available cash. But most envelope budgeters strive not to spend beyond the predetermined funds. So if the entertainment fund has run dry, then it’s Netflix at home instead of going out to the movie theater.

Though this budgeting approach may sound harsh, it can provide stricter guardrails that help individuals to spend within their means.

Zero-Based Budgeting: With zero-based budgeting, every dollar of income has a designated role and can be assigned as an expense. Another way to look at it: One’s income minus expenses equals zero.

Zero-based budgeting can take a little bit of extra work, since individuals would need to sit down at the start of each month to assign exact dollar amounts to necessary expenses, discretionary expenses, savings, and other costs. Budgeters seek to stop spending in each category when the allotted dollar amount gets spent.

Still, it may not always be possible to avoid running over the anticipated budget. In those cases, the amount spent in excess of the budget could be subtracted from discretionary funds in the next month. Or perhaps the budgeter may want to allocate more funds in the future for discretionary categories.

Track Your Spending to Stay on Course

As you budget, it’s important to determine whether incoming money can cover both regular and surprise costs. Ideally, your budget can help you monitor how much money you are spending and allocate it wisely to reach your goals. You may need to try a couple of budgeting techniques to find one that helps you wrangle your discretionary expenses.

Also, when either income drops or the cost of a necessary expense goes up, it can be necessary to update one’s budget accordingly. Making cuts to discretionary expenses may be one place to find more cash and avoid depleting the funds in your bank account.

On top of short-term expenses, it can be smart to allot amounts each month either to savings or an emergency fund. Automating savings might cut the temptation to shop, as these funds are already transferred to another vault or account (and, hence, harder to spend). Over time, as savings grow, funds could go toward pursuing long-term financial goals, such as a home down payment, starting a kid’s college fund, or investing for retirement.

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Why Tracking Discretionary Spending Is Key to Your Financial Goals

Consider these reasons why making a budget for discretionary expenses can benefit you:

•   Avoid overspending: When you have a budget, you have guardrails. You know how much money you have coming in and how it’s allotted. You know that if you spend too much, you could wind up with high-interest credit card debt, which can be challenging to pay down.

•   Paying off debt: With a budget for your expenses, you can likely rein in spending and focus on putting dollars toward wiping out high-interest debt.

•   Saving for your future: If you follow a budget and don’t go overboard with discretionary spending, you can likely funnel funds toward important goals, such as buying a house or paying for your child’s college education.

The Takeaway

Understanding discretionary expenses, which are non-essential, can help with smart budgeting and achieving one’s short- and long-term goals. Examples of discretionary expenses are often fun purchases and experiences, like jewelry, dining out, and concert tickets. Knowing how much you can afford to spend on these and sticking to your budget’s guidelines can help you manage your money better and enhance your financial health. Your bank may offer tools to help you monitor and manage your spending.

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FAQ

Are groceries and clothing discretionary expenses?

Groceries can be a discretionary vs. essential expense when you buy premium items that aren’t needed as part of a basic diet, such as high-priced exotic fruit or premium coffee or chocolate (though of course splurges can be part of a budget). Similarly, clothing can be a discretionary expense if it’s not a necessity (meaning things like a warm winter coat or basic clothes to wear to work). When you buy something just because you like it but don’t need it, that’s a discretionary expense.

What are discretionary expense examples?

Examples of discretionary expenses include travel, entertainment, and eating out.

What are examples of non-discretionary expenses?

Non-discretionary expenses are typically the needs or musts of basic life, such as housing and utilities, food, healthcare, transportation, and minimum debt payments.

What percentage of my income should go to discretionary spending?

According to the 50/30/20 budget rule, 30% of your take-home pay should go to discretionary spending.

How can I cut back on my discretionary spending?

To cut back on discretionary spending, it’s wise to analyze your spending, set guidelines for non-essential spending, and be mindful when shopping or considering expenses. For instance, while a new phone with bells and whistles could be nice, if that means going into high-interest credit card debt, it may not be wise. Budgeting apps may help you rein in discretionary spending.

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