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Discretionary Spending

What is Discretionary Spending?

Discretionary spending refers to purchases that aren’t considered essentials. It is what people often spend money on after they’ve settled their obligations like bills and debt. Discretionary spending are expenses that an individual doesn't require to live. Some examples include recreation and entertainment activities. Understanding what a discretionary expense is versus a non-discretionary expense can help an individual better manage their finances.

Detailed Look at Discretionary Spending in Personal Finance

When it comes to spending, people often think about what is essential and what is optional. Discretionary spending is optional spending. How people spend their money on these items and services depends on many conditions.

For example, a person may be willing to spend more money on luxury collectibles. They do so because of personal preferences, environment, and current income. Those going through a rough patch with their finances may not see that as a viable purchase.

Someone who enjoys eating out might spend a lot of their discretionary budget on such. It's really up to the individual what they'll spend money on that are “wants” versus “needs.”

Discretionary spending is all about costs that aren’t essential for day-to-day living. People have obligations to pay off taxes and utilities. Food, medication, hygiene items, and other stuff needed to live aren’t discretionary. On the other hand, eating out, entertainment, and much of online shopping are considered “wants,” or discretionary.

Types of Discretionary Spending

Discretionary spending is often different for each person, but they fall under the same categories. Here are some of the most common ones:

  • Luxury items: Luxury items often fall under a more expensive price tag than others. These can include electronics, collectibles, decorations, accessories, and the like.
  • Services: These services refer to the businesses that people engage with when they’re out. Some examples include movie theaters, restaurants, cafes, nightclubs, and more.
  • Travel: Travel as a discretionary expense refers to actions that aren’t necessary to fulfill work or personal obligations. The most common is travel for leisure which includes vacations. These cover all payments for the trip, like flight costs, rentals, food, etc.
  • Vices: People often spend their extra money on habits that they may or may not enjoy. These include tobacco and alcohol.
  • Non-essential food and beverages: People can go without eating out day-to-day, or spending money on junk food. Examples of these include fast food, desserts, and candy.
  • Hobbies: Hobbies cover a vast array of interests. It can be anything from sports to collecting. People often spend more money than usual on hobbies of interest. Examples include games and fitness.

Discretionary Spending Versus Non-Discretionary Spending

Discretionary spending covers all non-essential costs a person or household may have. One could go without spending too much on hobbies, and it will not affect their day-to-day living. They still have the essential costs covered. They can eat, rent or own their house, pay the bills, etc. It’s up to a person’s discretion to spend money on these products and services.

On the opposite end of the spectrum is non-discretionary spending. Non-discretionary spending is a non-negotiable cost. It is essential to daily life and survival. They are the costs that you need to keep living. Here are some of the most common examples:

  • Healthcare: Paying for healthcare ensures that you have money in case of an emergency. These cover insurance and savings.
  • Debt: People need to pay for any ongoing debt to avoid bad credit reports and accruing interest rates. These include student debt, credit cards, mortgages, and the like.
  • Food, Shelter, Utilities: What a person needs to fulfill his daily needs. It includes food, utility, and rent.
  • Taxes: Taxes are mandatory fees imposed by the government to help fund its operations.

People often carry all these types of non-discretionary spending, some more than others. For example, those averse to debt may not want credit cards or avoid student debt entirely. It means that they have fewer non-discretionary costs taken away from their income. The fewer non-discretionary payments you need to make, the more space you have for discretionary spending.