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When it comes to spending money, there are things that you want to buy — and things you have to pay for. That's the line between discretionary expenses and everything else. Wants versus needs.
What are discretionary expenses?
A discretionary expense is voluntary spending. You want to buy something, but it isn't mandatory. Entertainment and recreational purchases fall into this category.
On the other hand, bills such as rent, mortgage payments and utilities are nondiscretionary expenses. You have to pay those. When working with a budget, discretionary spending is drawn from the money left over after paying the essential bills.
» MORE: Budget calculator
What are examples of discretionary expenses?
"I would describe discretionary spending as the fun stuff, the things you want to spend money on, such as going out to eat, buying clothes, gifts, hobbies, entertainment, vacations, things like that," says Amy Jo Lauber, a certified financial planner with Lauber Financial Planning in West Seneca, New York.
Like there are different types of finance, discretionary expenses can take many forms and may include:
Electronics, such as a television or a phone upgrade.
A new vehicle.
Travel for pleasure.
Tickets to concerts and sporting events.
Spa visits (including the tip for a massage).
All of these items add to your quality of life but need to come after paying the bills and, optimally, after paying yourself.
How do discretionary expenses fit into a budget?
You may be spending more on wants than you realize. That can block you from putting aside enough money for emergency needs and retirement savings.
Accounting for discretionary expenses is a part of the 50/30/20 budget, a plan for controlled spending. In this system, up to half of your budget is allocated to needs, 30% to wants (the discretionary expenses we're talking about) and 20% to savings and debt repayment.
"I do like and use the 50/30/20 budget," Lauber says. "I think it works for people who don't want to feel guilty about spending on certain things and need guidance on saving. It provides a simple, reasonable framework free from the fuss of tracking spending in all the categories."
To start a simple budget, determine your monthly take-home pay, choose a budget plan that works for you and keep an eye on it. You may find it's easier than you thought.
» MORE: What is my take-home income?
Making good financial decisions
Thinking of money like this — in buckets of wants, needs and saving for the future — is part of a process for making good financial decisions.
"I encourage people to pay attention to all of their spending, not only discretionary, and moreover, to be intentional about their money, to make decisions with self-awareness, based on one's values and needs," Lauber says.
"This involves using the positive emotions such as hope, joy, delight, generosity, creativity and dreams to help us manage money in a way that is enjoyable and sustainable."
For example, try prioritizing the positive emotions tied to long-term plans, such as retirement or having no financial worries, rather than those related to the short-term satisfaction of impulse spending. Being thoughtful about today's discretionary expenses can feed your long-term wants and goals.