What is discretionary spending?

Managing your money is all about balance: covering your essentials and working toward your financial goals while leaving room for short-term satisfaction and fun. Discretionary spending refers to the non-essential expenses that you choose to spend money on after covering your necessary expenses. These are the little extras that make life more comfortable and enjoyable, but aren’t vital for day-to-day living. You can think of discretionary spending in terms of needs vs. wants: discretionary expenses are things you want, but don’t necessarily need. 

Grasping the concept of discretionary spending can help you make informed decisions that align with your financial goals. By distinguishing between essential and non-essential expenses, you can create a balanced budget that accounts for necessities, supports your lifestyle, and empowers you to put money toward your longer-term financial goals. 

Here’s what we’ll cover:

• Discretionary vs. non-discretionary spending
• How to manage discretionary spending
• Making a budget to include discretionary expenses
• Tracking your discretionary spending
• Prioritizing your discretionary expenses
• Reducing non-essential spending
• Reassessing your discretionary expenses

Non-discretionary vs. discretionary spending

Non-discretionary spending comes down to the basics you need to live, work, and take care of your health effectively. These are the expenses you must pay to maintain your basic standard of living. In contrast, discretionary spending includes those extra expenses that you could choose to cut back on if needed. Reducing discretionary spending might not always be comfortable, but it doesn’t involve cutting out things you need for survival.

Keep in mind that there are no hard-and-fast definitions for what counts as discretionary vs. non-discretionary spending. What feels like a want to one person may be a fundamental need for another. For instance, ordering delivery for dinner might be an indulgence for many people, but if mobility issues or time constraints make cooking at home nearly impossible, those delivery meals might be essential. The difference between discretionary and non-discretionary funds is deeply personal; it all depends on your particular circumstances.

Examples of non-discretionary spending:

• Housing: rent or mortgage payments
• Utilities: electricity, water, gas, phone
• Groceries: food, household essentials
• Insurance premiums: health, car, home
• Transportation: gas, public transportation fare
• Debt payments: student loans, credit cards

Examples of discretionary spending:

• Entertainment: movies, events, streaming services
• Dining out: restaurants, takeout, delivery 
• Recreation: hobbies, leisure activities
• Travel: vacations, day trips 
• Treats: spa services, feel-good shopping
• Luxury items: designer clothes, high-end gadgets

How to manage discretionary spending

If you want to reduce your spending, it may be tempting to cut all non-essential expenses. But it’s actually important to include discretionary spending in your budget. Otherwise, you’re likely to feel deprived, which can make it much harder to stick to your budget and saving goals. 

The key to managing discretionary spending is to find a reasonable balance between wants and needs. Prioritizing essential expenses may require cutting back on luxuries temporarily, finding less expensive options for discretionary expenses, or reducing costs in other areas. This balance will look different for everyone based on their life circumstances, financial situation, and goals.

Create a budget with discretionary spending in mind

The first step in managing discretionary spending is creating a budget. As you build your budget, establish budget categories and label expenses as non-discretionary or discretionary. This will give you a sense of how much money you’re spending on needs vs. wants.

With that in mind, you can adjust how much you budget for discretionary spending. You might want to try the 50/30/20 budget rule, where you devote 50% of your income to needs, 30% to wants, and 20% to saving and investing. You can always adjust the percentages to suit your personal financial circumstances. 

Track your discretionary spending

Once you’ve set a budget, it’s crucial to track your spending to ensure you stay within your limits. If you’re looking to reduce discretionary spending, it’s especially important to keep a close eye on it. There are a few techniques that can make this easier:

• If your banking app has budgeting tools that let you set a budget for various expense categories and track your spending, set them up and check in a few times a week.
• Monitor what you spend on essentials to see if you need to adjust your discretionary purchases. For instance, if you’re hit with an unexpectedly high electric bill one month, you might need to cut down on non-essential spending for a few weeks so you don’t blow your entire budget. 
• Set firm spending limits for discretionary expenses and stick to them. You could even adapt the envelope budgeting method just for non-essential purchases so that when you hit your limit, you’re finished spending in that category for the month.   

Prioritize your discretionary spending

Not all discretionary expenses are created equal. Prioritize your spending based on personal values and goals. Identify the non-essential expenses that bring you the most joy and fulfillment, as well as those you can easily forego without feeling deprived. This approach allows you to focus your discretionary budget on things that make the most difference to your life.

Reduce discretionary expenses where possible

There are many reasons to cut back on non-essential expenses: needing more money to cover your basic needs, prioritizing your get-out-of-debt plans, or increasing how much you can save each month. 

To cut down on discretionary spending, look for practical ways to save money, like reducing utility bills, cooking at home more often, or swapping some of your entertainment activities for free options. You might also want to use techniques to stop impulse buying so that your careful budgeting doesn’t go out the window on a whim. 

Reassess regularly

Periodically revisit your budget for discretionary expenses and how your actual spending lines up with your plans. You may find that you’re spending less or more than anticipated, so you’ll want to adjust your budget accordingly. And keep in mind that circumstances change. What may have been considered a non-essential expense at one point may become a priority in the future. By reviewing and adjusting your spending habits, you can ensure that your discretionary spending aligns with your current financial goals.

Manage discretionary spending to improve your money management

Understanding and managing discretionary spending is a vital aspect of maintaining financial health. By setting a budget, tracking your expenses, cutting back where possible, and prioritizing your discretionary spending, you can achieve a balanced approach to your finances. 

Remember that the meaning of discretionary spending is personal; what constitutes a necessity vs. a nice-to-have depends on your particular circumstances. So create a budget that reflects the realities of your life and start managing your discretionary spending so you can reach your goals.