What Is Discretionary Spending?

Quick Answer

Discretionary spending is using money for nonessential expenses like dining out, shopping, entertainment and subscription services.

Happy woman with her phone, credit card and bag after shopping in the city.

Some bills, like your housing payment, come around every month and are an essential part of life. Discretionary spending is more flexible. These are purchases for things that are wants, not needs. Understanding the difference between necessary and discretionary expenses can help you manage your money more effectively.

What Are Discretionary Expenses?

Discretionary expenses aren't essential, but they probably make your life more enjoyable. These purchases include everything from simple creature comforts to more expensive splurges. The amount you spend in this category may vary from month to month. Here are some common discretionary expenses:

  • Eating out (including to-go orders)
  • Meal kit subscriptions
  • Gym memberships
  • Personal grooming services (hair cuts, salon visits or skincare products)
  • Shopping for nonessential items
  • Books, music and other media
  • Entertainment (movies, concerts or theater)
  • Streaming services
  • Travel expenses
  • Birthday gifts
  • Holiday expenses

These expenses may not be essential, but some might improve your quality of life. A gym membership, for example, can help you stay healthy and support your mental well-being. What matters most is carving out room in your budget for whatever is important to you.

Discretionary Expenses vs. Non-Discretionary Expenses

If discretionary expenses are on one end of the spectrum, non-discretionary expenses are on the other. These are essential bills or necessary purchases that can't be ignored. Failing to keep up with them could negatively impact your credit and financial stability. Non-discretionary expenses often include your:

  • Rent or mortgage payment
  • Utilities
  • Internet and phone bills
  • Groceries
  • Minimum debt payments (credit cards, student loans or auto loans)
  • Insurance premiums
  • Medical expenses
  • Transportation costs

How to Reduce Essential Expenses

One rule of thumb is to keep your essential expenses at or below 50% of your take-home pay. If you're pushing that limit, here are some ways to potentially reduce them:

  • Consider debt consolidation. This can be a good option if you have high-interest debt. It involves taking out a new loan and using that to absorb your existing debt. You'll then have a single monthly payment—and a potentially lower interest rate.
  • Negotiate with your service providers. Contact your cellphone and internet providers to see if you can modify your monthly plans. It could help you lock in lower rates. You can also use a service such as Experian BillFixer™ to negotiate your bills on your behalf.
  • Shop around for new insurance policies. Comparing different auto insurance and home insurance plans might be good for your budget. You could get additional discounts if you're a student, senior, veteran or active service member.
  • Be mindful about grocery shopping. That may include weekly meal planning, buying items in bulk and finding other ways to save on groceries.

How to Budget for Discretionary Expenses

1. Choose a Budgeting Style

These budgeting methods earmark a portion of your income for discretionary expenses. The right one for you will likely depend on your spending personality.

  • 50/30/20 rule: The 50/30/20 budgeting style allocates 50% of your take-home pay to essential expenses, 30% to discretionary spending and 20% to financial goals.
  • 50/15/5 rule: The 50/15/5 approach puts half of your earnings toward necessary spending, 15% toward retirement savings and 5% toward short-term savings. The remaining 30% can be used for nonessential expenses.
  • Zero-based budgeting: With zero-based budgeting, you begin with your monthly take-home pay, then subtract all of your expenses until you get to zero. That gives every dollar a job. The amount you set aside for discretionary expenses can be a line item on your budget.

2. Track Your Expenses

It's important to figure out how much you typically spend on discretionary purchases. Begin by tracking your expenses. Review your debit and credit card statements from the last few months, jotting down all nonessential spending. What percentage of your monthly take-home pay is going toward this category? Most budgeting systems keep this number at or below 30%.

3. Adjust Your Discretionary Expenses as Needed

If you have a habit of spending more than 30% of your take-home pay on discretionary expenses, you can look for ways to trim your spending. That doesn't have to mean cutting all your "fun money" from your budget. Instead, it's about making reasonable trade-offs.

Let's say you really love going to live music events. To make that happen, you might choose to trade your cable package for a cheaper streaming service. Reducing some essential expenses can also free up more money for the fun stuff. Just be sure to continue saving for the future and setting money aside for your financial goals.

The Bottom Line

Discretionary expenses deserve room in your monthly budget. Planning ahead can help prevent overspending and allow you to enjoy some of your hard-earned money. It can also align your spending with your values.

Look at it as one more way to keep your financial health going strong. Free credit monitoring with Experian can also help on that front. You'll get an alert whenever something new shows up on your credit report. It's a simple way to identify potential fraud so you can take action quickly.