What Is a Discretionary Expense?

What Is a Discretionary Expense?

Let me tell you directly: a discretionary expense is a non-essential cost that you or your business can skip without messing up your day-to-day operations or basic survival. These are the wants in your budget, not the needs, so you can keep going even if you cut all discretionary spending. Think of things like eating out at restaurants or entertainment costs as prime examples.

Key Takeaways

Here's what you need to grasp: a discretionary expense isn't essential for running a home or a business. For businesses, these often tie into boosting reputation with customers and employees. By tracking them, you can spot savings opportunities during financial squeezes. And remember, what counts as discretionary varies from one person or business to another.

Understanding Discretionary Expenses

Expenses fall into categories like non-discretionary and discretionary. Non-discretionary ones are the must-haves—housing, taxes, debt, groceries—while discretionary ones go beyond necessities and are basically wants. They don't affect your core operations; they're about choices and lifestyle.

You pay for these with discretionary income, which is what's left after covering basics like housing, food, taxes, and other needs. When money is flowing, you might splurge on luxuries like cars, vacations, restaurants, entertainment, or electronics.

But when things tighten up and cash flow dips, you should look to cut unnecessary costs first. Discretionary expenses are usually the easiest to drop since they won't hit your business or household hard.

In a corporate setting, these expenses often promote the company's market position. Buying raw materials for production is essential, but something like employee training programs might not be. As an individual, if you're in a financial bind, you'd prioritize utility bills over funding a vacation.

Important Note

You need to understand and identify your non-discretionary and discretionary expenses—and figure out which ones matter most to you. This approach helps you save, set goals, and plan for your financial future.

Special Considerations

What counts as a discretionary expense is subjective and can differ a lot between people and businesses. For instance, a stable company might cut its advertising budget temporarily without much risk, but a new company in trouble would need to keep promoting to stay afloat and cut elsewhere.

The same goes for you as a consumer: a daily coffee run might be affordable when things are good, but you'd drop it during tough times or when saving for something big like a house or car.

Additional Insight on Types

Again, what's discretionary depends on who's spending. A new car might be a want for one person but essential for someone with a long commute where driving is the only feasible option.

How to Budget for Discretionary Expenses

When income drops in tough times, you might need to trim certain expenditures. Track discretionary expenses separately from essentials so you can quickly see where to reduce costs.

One solid tactic is to rank your discretionary expenses from least to most important. If a job loss or income cut forces changes, you can easily pick the first ones to eliminate.

Discretionary Expenses vs. Non-Discretionary Expenses

Expenses split into discretionary and non-discretionary, or essential and non-essential. Things like vacations and luxury items aren't needed to keep a household running, so they're discretionary—you choose to pay for them.

Non-discretionary expenses must be paid to keep everything operational, or you'll face consequences. For individuals, these include housing, taxes, and health insurance. For businesses, think payroll, warehousing, and transport.

What Are Discretionary Funds?

Discretionary funds refer to the money left over for non-essential goods and services after covering essentials. Governments, for example, might use them for small projects once core services are funded.

What's the Difference Between Discretionary and Fixed Expenses?

Discretionary expenses aren't essential to daily life or operations; they're unpredictable and can fluctuate. Fixed expenses are regular and predictable, like housing, rent, insurance, and utilities—you can count on them staying consistent each period.

What Does Discretionary Income Mean?

Discretionary income is what's left after paying necessities like taxes, housing, groceries, and utilities. You use it to maintain your lifestyle, covering things like vacations, luxury items, and savings.

The Bottom Line

Costs divide into essential non-discretionary ones and non-essential discretionary ones, like vacations or luxury goods. You spend on discretionary items after covering the must-haves, and they're the first to go when times are tough—remember, these are wants you can sacrifice.