What Is Discretionary Spending?

What Makes Up a Budget?

A budget includes all of your monthly expenses, and it's a way of comparing how much money you spend with how much you make. Keeping a budget allows you to see whether you're spending more than you earn, and helps you take steps to change things if you are.

When you make a budget, you can break your costs into two categories: necessary expenses and discretionary expenses.

Necessary expenses include the non-negotiable costs you need to cover each month, such as:

• Rent or mortgage
• Utilities
• Groceries
• Car loan
• Commuting costs
• Insurance premiums
• Prescriptions
• Student loan payments
• Credit card payments
• Personal loan payments

Discretionary expenses, on the other hand, are the nice-to-haves. You can think of discretionary expenses as quality-of-life purchases. They're purchases that are important to leading a satisfactory life, but that you could go without if push came to shove. Discretionary expenses include a broad range of costs and purchases, and the amount you spend in this category can vary greatly from month to month.

Here are some common discretionary expenses that may appear in your budget:

• Restaurant meals, including dine-in and takeaway
• Meal kit subscriptions, such as Blue Apron or HelloFresh
• Gym memberships
• Personal grooming services, including hair and salon visits
• Luxury clothing and accessories
• Books, magazines and other media
• Music or TV/movie streaming subscriptions, such as Netflix, Spotify, Pandora or Disney+
• Online movie rentals or movie theater tickets
• Concert tickets
• Subscription boxes, such as FabFitFun or BarkBox
• Travel costs, including airline tickets and hotel bookings
• Birthday gifts
• Holiday expenses, including gifts, baking supplies, cards, postage and the like

Without a budget that tracks your fixed and discretionary expenses, these costs can run together and cause you to lose sight of how your spending aligns with your income. If you spend too much on discretionary items and don't leave enough room for your necessary expenses, you could miss payments and risk harm to your credit, or worse.

But remember: Just because an expense is non-essential doesn't mean it's not important. For instance, your gym membership may be integral to your physical and mental health.

A budget helps you see exactly what your finances look like, and it allows you to adjust your lifestyle expenses as needed to manage your money, build savings and avoid debt.

Why You Should Track Discretionary Expenses

It's important to look over your discretionary expenses because getting clear on where your money goes provides a roadmap toward reaching your financial goals. They are also the lowest-hanging fruit when it comes to saving money if your financial situation changes, or you'd like to spend more elsewhere.

When you list out your discretionary costs, think about how important they are to you and whether they add much to your life. You may find some superfluous expenses and consider eliminating them, but the goal in identifying and prioritizing your discretionary purchases isn't necessarily to minimize your "fun" spending. Rather, it's to make sure you're emphasizing what's most important to you.

Perhaps you've been wanting to build up your emergency savings fund, but there never seems to be enough money left over at the end of the month. Making a list of your discretionary expenses may help you identify some ways to make these goals more attainable.

Maybe you want to max out your retirement investment contributions this year or build up a down payment for a house. Once you're clear on those priorities, you can look at your budget to decide what you might want to give up in favor of a big picture dream.

Another reason budgeting is helpful is that it allows you to anticipate discretionary expenses coming up later in the year. If Mom's birthday is two months away, you can begin saving now for the great gift you have in mind. Or, if your friend is getting married next year, you can make a savings plan to set aside a bit of your income every month toward a gift and travel costs. Planning ahead for big discretionary expenses reduces the chances that you'll feel strapped for cash by trying to cover the costs all at once.

Why Do You Need a Budget?

Creating a budget is a fundamental step toward building financial security and working toward your goals. Here's how a budget can help you:

1. Figure out if you're overspending. When you live outside your means, you can find yourself living paycheck to paycheck, which can be quite stressful. A budget helps you create savings and a financial buffer so you don't have to stress about having enough money.
2. Pay off debt. Listing out your monthly debt payments and discretionary expenses is a great way to motivate yourself. Eliminating just a few nonessentials can free up enough cash to make larger debt payments and clear your loan and credit card balances that much faster. Paying down debt can help you save money on interest and improve your credit score.
3. Save for the future. Whether you're building an emergency fund or saving for retirement, a budget gives you insight into your spending and income so you can come up with a workable savings plan. By putting money toward your goals each month, you can make steady, incremental progress.

You can structure your budget in whatever way works best for you. One popular method is the 50/30/20 rule, in which 50% of your income goes to necessary expenses, 30% goes to discretionary expenses and 20% gets allotted to savings.

But there are many ways to create and track a budget, and it's important to find one that works for you. Whatever budgeting method you choose, the key is sticking with it. Setting budget goals and assessing your spending at the end of the month can tell you how well you've done, and possibly motivate you to make changes the next month.

Take Control of Your Finances

Understanding the difference between your necessary and discretionary expenses helps you gain more control over your budget. Once you understand the costs you can cut, adjust or otherwise move around, you're able to do more to make sure you're spending efficiently. Whether that means cutting the gym membership you never use or deciding to spend less of your paycheck at restaurants, discretionary expenses are the first ones to examine when you want to save yourself some cash.