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Budgeting is an important step in developing a strong financial plan. But while it's critical to prioritize saving for the future and paying off debt, it's also important to set aside some money for an enjoyable lifestyle.
Whether you're creating a budget for the first time or trying to evaluate your existing approach, the right amount to budget for discretionary spending depends on your income, other expenses and financial goals. Being prepared for "fun" spending can help you feel less constrained and make it much easier to stick to your budget.
What Is Discretionary Spending?
Discretionary spending is a broad category that includes all of your nonessential spending. In other words, these costs aren't necessary for your and your family's basic needs.
Debt payments and essential expenses such as rent, utilities, groceries and debt payments aren't considered discretionary spending.
Examples of Discretionary Expenses
Some of the more common types of discretionary spending include:
- Streaming service subscriptions
- Dining out, takeout and food delivery
- Gym membership
- Concert and other event tickets
- Coffee shop purchases
- Hobby-related costs
- Charitable contributions
Note that some essential expenses can also become discretionary expenses if you want more than what's required for your basic needs.
For example, things like groceries, clothing and transportation are considered basic needs. But if you spend extra on snacks or fine dining, buy expensive clothing brands or upgrade your vehicle, those could all be considered discretionary expenses.
How Much Should You Budget for Discretionary Spending?
Ultimately, the amount you should budget depends on your income, expenses and financial goals. If your income is low or you have a lot of debt payments, for instance, it might make sense to cut back on your discretionary spending to increase your ability to save or pay down debt.
On the other hand, if you have a lot of income to work with, you may be able to afford to spend more on your lifestyle.
Consider the 50/30/20 Approach
If you're not sure where to start, consider using the 50/30/20 budget approach as your guide. Here's how it works:
- Spend 50% of your monthly income on necessities.
- Spend 30% of your monthly income on discretionary expenses.
- Put 20% of your income toward debt payments and saving and investment goals.
You don't have to stick to these exact proportions, of course, but the 50/30/20 approach provides a framework that you can customize based on your situation.
If you have a lot of debt or aspirational savings goals, for instance, you may want to increase that percentage and reduce how much you budget for discretionary spending. Also, if your basic expenses don't take up half your monthly income, you may have more freedom with the other two categories.
How to Reduce Discretionary Spending
If you've found that you're spending too much on nonessential expenses, cutting back can make it easier to meet your basic needs, save more and pay down high-interest debt. Here are some steps you can take to achieve your goal:
- Track your spending. If you don't already do this, take a look at your expenses for the past three months and categorize each one so you have an idea of where your money is going. Having all of your expenses laid out can help you better pinpoint the best ways to reduce your nonessential spending.
- Cut back on subscriptions you don't use. You may subscribe to several streaming services, but it's possible that you're not using all of them often enough to make the cost worth it. Identify monthly subscriptions you aren't using regularly and cancel them. You may even consider keeping one streaming subscription active at a time, switching between services every month or two based on what you're watching.
- Cut other recurring costs. If you have a gym membership you don't use, a subscription to a food delivery app or another recurring cost you can reasonably cut, consider whether you can benefit from the savings.
- Prepare for impulse spending. While there's nothing wrong with making the occasional unplanned purchase, doing it too often can wreck your budget. When you head to the grocery store, for example, make it a goal to stick to your shopping list. If you find something online that you want, consider adding it to a wish list and coming back to it in a few days to decide if you still want it—and save up for it if necessary.
- Look for cheaper ways to maintain your lifestyle. Take a look at the aspects of your lifestyle you don't want to downgrade and see if you can maintain them while also cutting costs. If you don't want to cancel streaming subscriptions, for example, consider asking a friend or family member to split one with you. Rather than buying new books, get a membership to your local library.
Also, while it may seem like you can't touch your essential expenses, don't be afraid to look for waste in that area of your budget as well. Look at each one and determine whether you may be overspending.
For example, shop around for auto insurance at least once a year to ensure that you're still getting the best rates and consider changing the temperature in your home by a couple of degrees to save on utilities.
Build and Maintain Good Credit to Minimize Costs
Your credit score may be indirectly affecting your discretionary spending, especially if your debt payments are high due to higher interest rates. Review your credit score and credit report to evaluate your credit health, and look for opportunities to improve your credit score over time.
With good credit, you may be able to refinance or consolidate debt into a lower interest rate and free up more cash flow for other financial goals and discretionary spending.