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What Is a Discretionary Expense?

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A woman calculating her discretionary expenses

Achieving financial stability often requires a blend of judicious planning, disciplined spending and clever investment approaches. An essential ingredient in this mix is understanding and managing discretionary expenses – those costs we often deem non-essential. These expenses may not appear significant on the surface but can shape your financial trajectory. Here’s a deeper look into the world of discretionary expenses, and how to navigate them for a stronger financial future. You may want to talk to a financial advisor if you need help getting discretionary expenses under control or if you’re not sure what your budget should look like. 

Importance of Discretionary Expenses 

Discretionary expenses are like the wild cards of your budgeting game: they could either elevate your lifestyle or make it a lot more difficult. Control these wild cards wisely and you can funnel more funds toward long-term dreams like retirement or other financial goals. This redirection is possible because money saved from discretionary spending can be utilized elsewhere, aiding in your goal of growing wealth

While it’s tempting to think high discretionary expenses can stint savings or squeeze investment funds, we have to remember it’s not black and white. There might be scenarios mitigating this impact. Therefore, being in touch with your discretionary spending habits is critical to charting your financial journey successfully.

Picture an evening at your favorite luxury restaurant, or treating yourself to that online shopping extravaganza. These are textbook examples of discretionary expenses. These expenses usually include optional spending like luxury goods, getaways, dining out extravagances and other items not crucial for survival or basic functioning. What’s exciting is that, unlike fixed expenses such as rent or utilities, discretionary expenses can be tweaked or entirely done away with, offering you control over your budget. 

Discretionary Expenses for Your Home vs. Business 

A woman looking at her discretionary expenses at the grocery store.

Let’s draw the line between personal (or home) and business discretionary expenses for a better overall understanding. The former can range from entertainment to travel costs or gym memberships. In contrast, the latter might include advertising expenses, employee bonuses or office decor. 

To provide a contrasting snapshot: in a personal setup, your family’s choice of dining out weekly or indulging in annual vacations abroad qualifies as discretionary expenses. Likewise, in a business environment, the company’s decision to invest in a state-of-the-art CRM system, throw regular team-building events or renovate office spaces are all examples.

Seizing these distinctions can fine-tune your budgeting strategies and financial planning for each specific scenario, culminating in effective treasury management. However, regardless of how they vary the fact remains that discretionary expenses can derail a home or business budget if they aren’t carefully watched and addressed. 

Discretionary vs. Non-Discretionary Expenses

Switching gears to non-discretionary expenses, these are necessary costs such as shelter, utilities and groceries for individuals, or salaries, rent and utilities for businesses. But just because these are non-discretionary expenses it doesn’t mean that there isn’t anything you can do to keep spending down. In some situations, these costs can also be tweaked or managed. 

While both these expenses can disrupt or stabilize your budget, discretionary expenses allow more flexibility for you to change them quickly. On the contrary, non-discretionary expenses tend to be fixed and unavoidable or more long-term. So, while the latter stands firm as your budget’s backbone, the former can help adjust your money habits to hit your financial goals. 

Budget Tips for Cutting Discretionary Expenses 

Reducing those “wants” we often give in to can be tackled with a set of creative strategies and proper budgeting. Ideas like setting a strict discretionary spending limit, preferring needs over wants and finding frugal alternatives for non-essential goods or services, may all help. 

As an example, individuals can call their living room their gym, avoiding monthly memberships, or businesses can opt for open-source software saving licensing fees. Remember, these are just potential paths to follow; they do not assure results and the right financial path is going to vary greatly between person or business.

Keeping a keen eye on your discretionary expenses with timely tracking and control is also crucial. Employing budgeting apps, scrutinizing your bank statements regularly and setting up spending alerts can all guard your bank balance effectively, fostering better financial discipline and healthy monetary habits. The more money you save, the more you might be able to invest for later. 

Bottom Line 

A woman regretting her discretionary expense purchases

Whether you’re an individual saving for retirement or a business planning for expansion, the way you handle your discretionary expenses can be a game-changer. These expenses can amplify your lifestyle or business operations. Bringing these expenses under better control can guide your journey toward long-lasting financial success. But remember, it’s a balancing act with your financial capabilities and goals.

Tips for Managing Expenses

  • If you’re struggling to find the right balance in your budget, especially with your business, then you might need the help of a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now
  • If you’re working on your personal finances, consider using our free budget calculator to help you as you go. 

Photo credit: ©iStock.com/Eleganza, ©iStock.com/LordHenriVoton, ©iStock.com/nicoletaionescu

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