Understanding Discretionary Expenses

By Janet Siroto · February 27, 2024 · 12 minute read

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Understanding Discretionary Expenses

When it comes to spending money, there are the needs in life, and then there are the wants. Of course, when it comes to essentials, you need to shell out for a roof over your head, food, healthcare, WiFi, and other essentials. But those enticing wants can open up a world of fun purchases, dining out, travel, and other discretionary expenses.

What is the definition of a discretionary expense? It’s a non-essential outlay of cash. Examples are any spending that is not required or that is driven by individual preference (say, a brand new fully loaded Bronco vs. a used minivan). They’re optional things that you can choose to spend money on or not. Think of upgrading to a new phone because the camera is cooler or deciding to head to the beach for a long weekend. Those are discretionary, for sure.

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. Read on to learn more about these costs and how to manage them.

Key Points

•   Discretionary expenses are non-essential costs that can be adjusted or eliminated to free up money for savings or other financial goals.

•   Examples of discretionary expenses include dining out, entertainment, vacations, and luxury items.

•   Differentiating between discretionary and non-discretionary expenses helps prioritize spending and make informed financial decisions.

•   Tracking discretionary expenses can reveal patterns and areas where adjustments can be made to save money.

•   Balancing discretionary spending with saving and investing is key to achieving financial stability and reaching long-term goals.

What Are Discretionary Expenses?

So, how can someone identify discretionary expenses? To do so, it can be helpful to take a step back and consider what a necessary expense is.

Needs are more or less mandatory or unavoidable. For example, housing expenses, like mortgage payments or rent, are things a person can’t do without.

Most workers have to pay federal and state taxes on their work income. People with outstanding debt are generally expected to make monthly payments. And, in everyday life, food (aka groceries) and fuel (aka gas or public transit) are typically must-haves.

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 income. They reflect the goods and services that may not be vital for survival but that people frequently spend money on.

Types of Discretionary Expenses

What are discretionary expenses exactly? Here’s a list of some common ones to consider.

•  Eating out: 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.

•  Grooming services: Soap and shampoo may be musts, but massages, manis, facials, and the like are luxuries. Same goes for sending your furbaby to the doggie spa.

•  Entertainment: Concerts, movies, comedy shows, and plays can be wonderful experiences. Though you may argue that Taylor Swift or Beyonce tickets are necessary for survival, these are discretionary spending in truth.

•  Media: Books, streaming platforms, magazines, and the like are also discretionary expenses.

•  Subscription boxes: 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.

•  Gifts: Sure, you love treating your nearest and dearest, but splashing out on gifts is optional and therefore a “want,” not a need. Same for holiday trappings, like that high-priced chocolate pecan pie from your favorite bakery.

•  Travel: While the “I need a vacation” sentiment runs strong, taking a trip is considered a discretionary expense.

•  Clothing: Some clothing (such as items you wear to work) may be rightly considered needs, but when you buy cute shoes on sale just because, well, they are so cute, that is a “want.”

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Understanding Needs vs. Wants

Are you seeing a pattern here? 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 isn’t always cut and dry. As with any personal choice, there’s likely a significant element of subjectivity.

•  As mentioned above, 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 save money.

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Budgeting for Discretionary Expenses

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 future 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.

Advantages of Budgeting for Expenses

Consider these reasons why budgeting for 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 short- and long-term goals, such as buying a house or paying for your child’s college education.

Tallying Monthly Income and Earnings

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 gigs

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

Understanding Regular Non-Discretionary Expenses

Next, a would-be budgeter might want to write down all necessary expenses and add up their associated costs. Some regular expenses could vary from month to month. So, it might be helpful to go back and look at costs incurred every month during the last year. This way, it’s easier to average the amounts that get spent on X, Y, and Z essential costs.

Whenever budgeting, it’s important to determine whether incoming money can cover both regular and surprise costs. Ideally, an individual would have enough money saved or in income to pay for all necessary expenses.

Setting Aside Funds for Later

On top of short-term expenses, some budgeters like to allot amounts each month either to savings or to a rainy day fund (you’ll learn more about the actual amount in a minute). With some money management accounts or retirement plans, users can directly deduct funds from a paycheck on payday.

Automating savings might cut the temptation to shop, as these funds are already transferred to another vault or account (and, hence, harder to spend).

If money isn’t being auto-saved, budgets can be updated to include savings under the discretionary fund category. Over time, as savings grow, squirreled away 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.

Tabulating a Discretionary Expense Budget

Once essential expenses have been budgeted for, a list of discretionary spending costs can be drafted. This can cover broad categories that might include trips, entertainment, savings, or eating out.

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.

Budgeters could rank, for instance, their discretionary spending according to what’s least or most important. A food lover, for instance, might want to allot more to dining out than an avid skier.

With discretionary expenses prioritized and mapped out, it can be easier to tighten a budget, identifying easier-to-cut-back-on items.

Budgeting Strategies That Include Discretionary Expenses

There are a variety of different budgeting methods. And, some are particularly suited to tracking discretionary spending. Here’s a look at common budgeting strategies:

The 50/30/20 Rule

The 50/30/20 rule was popularized by Elizabeth Warren and 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 the 50/30/20 calculator below 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.

Line-item budgeting can show the nitty-gritty of personal spending habits.

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.

It can also help people to compare their spending habits over extended time periods, such as a month or a year.

Making comparisons in this way can help keep spending in line with previous months. Because line-item budgeting is a spending tracking system, it doesn’t necessarily help build toward goals, like savings or retirement. It’s not designed to cut costs.

Envelope Budgeting

Envelope budgeting can be a useful way to track discretionary spending for two reasons: 1) It’s tangible, and 2) it’s strict.

When using the envelope method, 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.

To limit the urge to spend beyond the budget, only the allotted amount is placed as cash in each envelope. Afterwards, just the cash in that envelope is used to make purchases within that category of expenses. 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. And, if a person blows through their eating-out budget, it could be fun to do a refrigerator sweep. Often, a tasty meal can be whipped up with groceries that have already been purchased.

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

For some, adopting this “tougher” approach to budgeting can help reinforce tighter spending habits.

Zero-Based Budgeting

Zero-based budgeting is another way to track spending. The idea behind this budgeting strategy is that every dollar of income has a designated role and can be assigned as an expense. In this way, 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.

With zero-based budgeting, the goal is to stick within the dollar amount assigned to each expense. 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.

💡 Quick Tip: If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt, so try to eliminate that ASAP.

Tracking Discretionary Spending with a Budget

One part of adopting a budget is finding a tracking system that works for the long haul. So, when figuring how to track spending, it can be helpful to go with the approach that fits individuals’ financial goals and habits.

Online budget tracking tools are one way to help make sense of spending. There are plenty on the market, and your bank may well have tools for this purpose.

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Is clothing a discretionary expense?

Clothing can be a discretionary expense if it’s not a necessity, such as 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.

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