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. In other words, wants versus needs.
What is discretionary spending?
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, home loan payments and utilities are non-discretionary expenses. You have to pay for those.
When working with a budget, discretionary spending is drawn from the money left over after paying the essential bills.
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What are examples of discretionary expenses?
Think of the “fun” things you spend money on, like dining out, ordering takeaway and buying clothes and gifts. Discretionary spending also includes the money you spend on hobbies, entertainment and holidays.
Here are more examples of discretionary expenses:
- Electronics, such as a TV or a phone upgrade.
- New furniture.
- A new vehicle.
- Appliance upgrades.
- Tickets to concerts and sporting events.
- Charitable contributions.
- Spa visits.
All of these items add to your quality of life but need to come after paying the bills and, optimally, after paying yourself. A “reverse budgeting” strategy involves creating a spending plan around your savings goals, like retirement or buying a home. This differs from traditional budgets, which tend to focus on fixed and variable expenses.
How do discretionary expenses fit into a budget?
You may be spending more on wants than you realise. 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.
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 that tracking monthly expenses is easier than you thought.
Looking to increase your cash flow? Consider these 25 ways to make money online, offline and at home.
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. It helps you to be more intentional about your money while ensuring you’re enjoying life within your financial means.
Managing money in this way is directly linked to emotion. For example, try prioritising 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 financial goals.
» MORE: How to Get Out of Debt
If you’re in the United States, read this article on the NerdWallet US site.