What is a discretionary expense?
Quick insights
- A discretionary expense is a cost for something you want rather than something you need.
- These nonessential costs might include dining out, entertainment and travel.
- Tracking these expenses could help you manage your budget and reach your financial goals.
Treating yourself to a fancy coffee or a night out may be the highlight of your week, but it can also take a bite out of your budget. Balancing your finances often means making choices between essential bills and fun extras. Every time you pay for these extras, you're spending money on a want rather than a need.
A discretionary expense falls into this category of nonessential spending. Reviewing these purchases might help you find a better balance between your needs and wants.
The basics of discretionary expenses
Discretionary expenses are costs for goods and services that aren't essential for your basic survival or daily functioning. You might think of them as the "wants" in your budget.
When you have money left over after paying your taxes and essential bills, you might use it to fund these optional costs. Because these items aren't strictly necessary, you have the flexibility to reduce or eliminate them if your financial situation changes.
Discretionary vs. non-discretionary costs
Categorizing your spending might help you manage your money more efficiently. Expenses generally fall into two main buckets: discretionary and non-discretionary.
Non-discretionary expenses are the essential bills you must pay to maintain your life and household. These expenses typically include:
- Housing
- Basic groceries
- Utilities
- Transportation
Discretionary expenses are the optional costs that fund your lifestyle. You might wonder if things like groceries and clothing fall into this category. While basic food and everyday clothing are non-discretionary needs, dining out at a restaurant or buying designer clothes would be considered discretionary.
If you experience a drop in income, these optional costs are usually the first expenses you might consider cutting to balance your budget.
Common examples of discretionary spending
Identifying these costs could make it easier to review your financial habits. Here are a few common categories:
- Dining out: Buying a morning coffee, ordering takeout or eating at a restaurant.
- Entertainment: Paying for streaming subscriptions, concert tickets or movie passes.
- Travel: Booking a family vacation, a weekend getaway or a staycation.
- Hobbies and lifestyle: Spending money on gym memberships, recreational gear or new clothes that aren't required for work.
Ways to budget for discretionary expenses
Creating a plan for your optional spending could help you build a stronger financial foundation. You might consider calculating your discretionary income first, which is the money left over after your essential bills are paid.
Once you figure out that number, you could set a specific monthly limit for your wants. Choosing a budgeting method that fits your style might make it easier to track your spending and stay on course without feeling restricted.
Potential benefits of tracking these costs
Keeping an eye on your optional costs could be a helpful step toward reaching your financial goals. If you find that you're spending too much on nonessential items, you could look for areas to cut back.
Redirecting some of those funds into a savings account might help you build an emergency fund or save for a long-term goal. If your income is low, reducing these optional costs could be a helpful step toward financial stability.
The bottom line
Tracking your discretionary expenses may help you better decide how to use your money for things like hobbies and travel. Once you've separated your needs from your wants, you may be able to prioritize your spending more effectively. You might consider reviewing your monthly budget to get a clearer picture of your financial health.
