Understanding Discretionary Expenses: What Are They and How to Manage Them?

In building your budget, you’ll often hear financial advisers suggest cutting back on discretionary expenses. In theory, that sounds good. But what exactly are discretionary expenses? The most common examples are a $6 coffee or avocado toast at a restaurant. While $6 per month is unlikely to make or break your budget, small decisions on where you spend money on anything other than essentials can have a big impact on your financial health over time. 

Discretionary spending is how you spend on anything other than basics like food, housing, and medical care. Learning what discretionary expenses are and how to build them into your budget and financial planning could help you save thousands a year. Read on to learn how.

What Are Discretionary Expenses?

First, essentials. Essential expenses are expenses you must make to live. They’re not necessarily fun but are, as the name implies, essential for living. This includes housing, food, transportation, utilities, insurance, medicine and debt repayment. Everything that doesn’t fall into the “essential” category is a discretionary expense. Discretionary expenses are “wants” rather than “needs.”

Wants mean you can choose to spend on that item or activity, but your accommodation, health or safety would not be affected if you opt out. Examples of discretionary expenses include everything from eating out to concert tickets, clothes, streaming services and recreational activities. 

Keep in mind that the goal isn’t to reach zero discretionary expenses. It’s to understand that you can choose how you use these funds, and allocating even a small amount each week to savings can have a big long-term effect. 

Discretionary expenses, collectively, could make up one-third or more of the average family’s spending. It’s important to understand how you’re using your money and whether it adds value to your life. 

For example, a more long-term discretionary expense could include saving for a special vacation. While investing doesn’t usually fall into definitions of discretionary expenses, you can always allocate more of your discretionary funds to investments or retirement savings. 

Common Types of Discretionary Expenses

Examples of discretionary expenses are as diverse as individuals making the expenses. Here are some common discretionary categories:

• Vacations and travel expenses
• Automobiles — especially if you could take public transport
• Alcohol and tobacco
• Restaurant meals 
• Movie tickets, concert tickets, sports tickets and other entertainment-related expenses.
• Coffee and specialty beverages
• Hobbies such as crafting, sewing, knitting, woodworking or other creative pursuits
• Sports and gym memberships, such as tennis, golf, rock climbing or yoga
• Specialty foods or extra treats
• Personal care beyond the basics, such as luxury skincare or hair products

The Role of Discretionary Expenses in Personal Finance

The impact of discretionary expenses on savings and financial goals is bigger than most consumers realize. Spending — or saving— an extra $30 per day adds up to over $10,000 in a year. Likewise, saving just $50 per week would result in $2,600 in additional savings; that’s just $7.14 a day or about the cost of that take-out coffee.

Most financial advisers will tell you that small expenses add up over time. It’s true and important to understand. But it’s equally important to understand how those discretionary expenses can bring extra joy or comfort to your day. If that $7 cup of take-out coffee is the best part of your day, don’t cut it out. Consider where else you could cut expenses without reducing your quality of life. 

You’ll also want to consider how you balance discretionary expenses with fixed expenses. Fixed expenses include regular monthly payments like a mortgage or rental payment as well as fixed payments like student or auto loans. 

While the exact amount of utility payments may vary slightly by month, most financial advisers consider utilities, insurance and regular medicine purchases in the category of fixed expenses as they are more or less the same every month. If you maintain a food budget, that could also fall into the category of fixed expenses. 

Tips for Managing Discretionary Expenses

Practical tips for managing discretionary expenses start with knowing what you’re spending. You can consider using a budgeting app to track expenses. You can do this manually with pen and paper or in a simple spreadsheet. Once you’ve tracked your expenses for a month, look at where each percentage of your funds are going. How much are you spending on discretionary categories? 

Then, list where you can cut back and create a provisional budget. You can continue to adapt the budget as you adjust. Learn more about creating a budget or consider the 70-20-10 budget.  

Remember to make gradual changes. If you spent $500 in the first month eating out, start by reducing that amount by 20% to 50%, rather than declaring you’ll stop eating out altogether. Sustainable changes are easier to stick with long-term. 

Other strategies to reduce discretionary spending include:

• Make a list and stick to it when grocery shopping
• Reevaluate or pause recurring expenses like app subscriptions or streaming services
• Pay off credit cards to reduce interest payments
• Consider a no-spend challenge for one week to one month to avoid all discretionary spending for a period. This can give you a sense of which expenses add value and which you’re happy to cut out permanently. 
• Find free or low-cost activities in your area to replace some high-expense activities without sacrificing fun. 

Remember that there’s no single destination; it’s more like a dance in which you continuously adjust your expenses with savings goals to reach long-term financial stability. If you spend more in one category, you can always cut back on another. Like anything, with practice, it gets easier. If it seems daunting at first, set smaller goals and keep adjusting. 

Building Your Financial Freedom

Understanding discretionary expenses empowers you to use your money in a way that gives you the greatest value. The first step is to understand what you’re spending on now and look for opportunities to cut back. Even an extra $100 a week in savings is $5,200 a year. 

Start with small changes, surround yourself with others who have similar goals, and consider opportunities to add greater value to your life while spending less. You can also find more budgeting tips for young adults and come back to Benzinga Money for more financial information and tips to take control of your financial health.

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