Discretionary ExpensesDefined along with Examples

Written By:
Adiste Mae

What is a Discretionary Expense?

For individuals and businesses, expenses are divided into needs and wants.

Discretionary expenses fall under the “wants” category and refer to those that a person or a company can do without if necessary.

They are also called non-essential spending because these expenses are, from the name itself, not essential and will have little to no impact in a person’s life when these expenses are stopped. 

Understanding Discretionary Expenses

Expenses are split into two categories – discretionary and non-discretionary.

In simpler terms, non-discretionary expenses are those that are necessary to be incurred, also called as needs such as utilities, groceries, mortgage, taxes, etc.

Discretionary expenses are those that one can do without and are beyond the needs of a person.

While non-discretionary expenses are needed for a person to survive and go about their day to day life, discretionary expenses are just generally lifestyle choices. 

The money used to pay for discretionary expenses is called a discretionary income, which is the amount of money left after a person pays for their basic needs.

When a person or a company has money left over after paying for necessary expenses, they have more wiggle room to spend it on stuff that they want – vacation, luxury items, a new gadget, or dine out with friends and family. 

When times are tough and people have just enough to pay for their needs, the budgetary decision is always to reduce or completely eliminate discretionary spending.

When an individual or a company decides to cut costs, they will always look at the discretionary expenses first because eliminating it will have little effect on the operations of the business or the everyday life of a person. 

In a corporate setting, discretionary expenses can also mean marketing expenses incurred to help the company’s market position.

While raw materials to produce the products of the company are necessary to the business, the training costs of the employee may be considered as discretionary. 

Types of Discretionary Expenses

Examples of discretionary expenses include the following:

• Purchase of Luxury Items
• Family Travel or Vacation
• A New Gadget or Electronics
• Entertainment Related Expenses (Dine outs, movie dates, etc.)
• Expenses related to hobbies or sports

Some people blur the definition of wants and needs.

For example, a car may be needed by someone who lives far away from their office, making a vehicle an essential purchase.

But buying a luxury vehicle is not a need, it is a want. 

Defining what is a non-discretionary or discretionary will still depend on the situation of a person.

Some items that are considered discretionary might be a necessity for some. 

Discretionary Expenses vs. Non-Discretionary Expenses

What clearly defines discretionary expenses versus non-discretionary expenses is the need for the cost to be incurred.

Non-discretionary expenses are essential and as such, they need to be incurred.

Examples of non-discretionary expenses are the following:

• Taxes
• Salaries
• Insurance
• Rent / Mortgage
• Utility Bills
• Food
• Inventory
• Software / Hardware

When a person or a business does not pay for non-discretionary expenses, they will suffer the consequences of not paying them.

On the other hand, discretionary expenses are not considered as needs – a person or a business has the discretion to spend money on it or not. 

Special Considerations

What individuals and companies consider to be discretionary is subjective.

A well established company, during tough times, can make a few cuts in their budget while a newly established company may have to make a more aggressive cut to their expenses – a difference between keeping the company running or closing down. 

The same is true with individuals.

When the economy is good and one has more money to spend on non-essential stuff, they can opt to meet up with friends regularly and eat out, or maybe get their coffee fix each morning from their favorite coffee shop.

But when faced with financial difficulties, they can decide to do away with all the non-essential stuff and focus only on their basic needs. 

Budgeting for Discretionary Expenses

Budgeting and tracking expenses is an important tool for households especially when the household income decreases.

When deciding to cut their expenses, it is always helpful to have an understanding of where they spend most money.

When they know how much they spend on certain expenses and are able to identify their importance, they will be able to easily decide which ones they can cut from their budget.