What is a discretionary expense?
– Definition: A discretionary expense is a cost that is not required for basic living or essential business operations. In other words, it’s spending made by choice—items and services you can stop buying without immediate harm to your household or company.
– Examples: dining out, vacations, streaming services, new consumer electronics, and many marketing or training programs at firms.
Key related terms (defined)
– Discretionary income: The money remaining after paying essential costs such as housing, food, utilities, taxes, insurance, and required debt payments. This leftover amount can be allocated to non-essential spending, saving, or debt reduction.
– Non-discretionary expense (essential expense): A cost that must be paid to maintain basic functioning—examples include rent or mortgage, groceries, minimum debt payments, and required business inputs like raw materials for production.
– Fixed expense: A type of predictable cost that recurs regularly and tends to be stable in amount (for example, rent or a fixed insurance premium). Fixed expenses can be either discretionary or non-discretionary depending on whether they are essential.
Why it matters
– Discretionary expenses are flexible; they can be reduced or eliminated quickly to improve cash flow.
– Tracking discretionary spending separately helps households and managers prioritize cuts when income falls or when saving for a goal.
– What counts as discretionary varies by circumstance: a car might be discretionary for one person but essential for another with a long commute.
Common categories of discretionary spending
– Personal lifestyle: restaurants, bars, hobbies, subscriptions (streaming, apps), luxury clothing and gadgets.
– Travel and leisure: vacations, hotel stays, tickets to events.
– Optional transportation and upgrades: new vehicle purchases beyond basic necessity, premium auto features.
– Corporate non-essentials: advertising above base levels, discretionary training programs, brand promotion activities.
How discretionary differs from other cost types
– Discretionary vs. non-discretionary: Essential vs. optional; the former must be paid to avoid consequence, the latter can be forgone.
– Discretionary vs. fixed: “Fixed” describes frequency and predictability; “discretionary” describes necessity. A fixed rent payment is non-discretionary for most households; a fixed luxury subscription could be discretionary.
Practical checklist to manage discretionary spending
1. List monthly income sources (net after taxes).
2. Itemize essential (non-discretionary) expenses: housing, food, utilities, insurance, minimum debt service, transport required for work.
3. Subtract essentials from net income to compute discretionary income.
4. Track discretionary categories separately (food out, entertainment, travel, subscriptions, impulse purchases).
5. Rank discretionary items by importance or utility (least to most important).
6. Set caps or percentage targets for total discretionary spending.
7. Automate savings before discretionary spending (pay-yourself-first).
8. Review and adjust monthly or when income changes.
Step-by-step budget approach (simple)
– Step 1: Calculate monthly net income.
– Step 2: Add up all essential monthly costs.
– Step 3: Net income minus essentials = discretionary income.
– Step 4: Allocate discretionary income among savings, debt repayment, and wants according to priorities.
– Step 5: If income drops, eliminate or reduce lowest-priority discretionary items first.
Worked numeric example
Assumptions: single household, monthly net income = $4,000.
1. Essential costs:
– Rent: $1,200
– Groceries: $400
– Utilities & phone: $200
– Insurance (health + auto): $250
– Transportation (fuel, basic transit): $150
– Minimum debt payments: $200
Essential total = $2,400
2. Discretionary income = Net income − Essential total
= $4,000 − $2,400 = $1,600 available for discretionary uses.
3. Suggested discretionary split (example):
– Emergency savings / extra debt payment: 50% = $800
– Dining out & entertainment: 30% = $480
– Travel / discretionary purchases: 20% = $320
If income falls to $3,200, essential costs remain $2,400 (or may need trimming). Discretionary income drops to $800; you’d then prioritize savings and must cut dining, travel, or discretionary subscriptions accordingly—starting with lowest-ranked items.
Special considerations and caveats
– Subjectivity: Personal and business contexts change what’s “discretionary.” New companies or people with special needs may treat some discretionary categories as essential.
– Business vs. household: For firms, some promotional spending supports future revenue—cutting it can reduce long-term growth even if it helps near-term cash flow.
– Timing and predictability: Some discretionary costs are irregular or seasonal; tracking on an annual basis can help smooth budgeting decisions.
Quick tips for cutting discretionary spending
– Track small habitual purchases (they add up).
– Pause or downgrade subscriptions before canceling to test impact.
– Rank and remove the lowest-value items first.
– Set clear short-term goals (e.g., save X for a down payment) to motivate restraint.
Sources
– Investopedia — “Discretionary Expense” https://www.investopedia.com/terms/d/discretionary-expense.asp
– U.S. Bureau of Labor Statistics — Consumer Expenditure Survey https://www.bls.gov/cex/
– Federal Reserve — Survey of Consumer Finances https://www.federalreserve.gov/econres/scfindex.htm
Educational disclaimer
This explainer is for educational purposes and does not constitute personalized financial advice. For guidance tailored to your situation, consult a qualified financial professional.