What Is Discretionary Spending?
The difference between discretionary spending, otherwise known as optional spending, and required expenses isn’t always clear. Here’s what you need to know.
February 18, 2022
Most of us have two broad types of expenses: essential expenses, like rent and groceries, and optional expenses, like restaurants and entertainment.
These optional expenses can be considered discretionary spending.
Sometimes the line between essential and discretionary can be a bit blurry. For instance, groceries are considered a necessary expense, but if you’re splurging on luxury cheese, fancy wine and T-bone steaks every week, part of your grocery bill might still be considered discretionary.
There’s a lot to consider here, so this guide will help set the record straight. What is discretionary spending, and how might it affect your budget?
What does discretionary spending mean?
Discretionary spending is simply any spending that is optional — i.e., not required.
Discretionary spending can be thought of as the “nice to haves,” like restaurant meals, travel and entertainment. On the other hand, you can think of required spending as the “necessary to live” expenses: rent, utilities, groceries, etc.
Sometimes the line between the two isn’t very clear. Take clothing, for instance. We all need clothing, but spending more money on clothing when you already have a good wardrobe at home could certainly be considered discretionary spending.
The same goes for food. We need food to survive, but there’s a big difference between buying standard groceries each week and ordering takeout every night.
Discretionary spending examples could include:
Restaurants and bars
Meal delivery kits and takeout
Gym and fitness subscriptions
Hobby and sports expenses
Professional services: house cleaners, meal-prep services, etc.
This list is far from exhaustive. Essentially, any spending that is truly optional could be considered discretionary.
Why it matters
Discretionary spending matters when making a budget and planning out your finances.
It’s important because it’s the main spending category that you can actually control.
You likely have limited influence on the mandatory spending in your life. Sure, you may be able to move to a smaller home to save on rent, but you’ll still be paying a big chunk of your budget for housing, even if you downgrade substantially.
But discretionary spending is different. You could cut out up to 100% of optional spending on bars and restaurants, for instance; your lifestyle would change, but it’s still possible to live a happy, healthy life without restaurant meals. And that could make a huge difference in your monthly budget.
In theory, you could cut your discretionary spending altogether. While it’s certainly not recommended to do this, realizing that this is possible can be a powerful step toward improving your spending habits.
Debt and discretionary spending
Here’s another consideration: Many of us have debt and until that debt is paid off, it’s in our best interest to reduce our discretionary spending.
Fortunately, reining in our discretionary spending can help many of us get out of credit card debt faster. Even cutting back in small ways and making extra payments toward debt can have a meaningful effect on your financial health.
How much of your budget should be discretionary?
When setting a budget, it’s important to figure out what expenses are discretionary to you, and how much is really reasonable to spend on optional items.
There’s no one-size-fits-all answer, but we can look to the guidance of financial experts to get an idea.
The 50/30/20 budget rule is a decent starting point. This strategy states that households should aim to spend 50% of their take-home pay, after taxes, on essentials, 30% on discretionary spending and 20% on savings or debt payments.
This rule may not apply to everyone. Here’s what to consider:
Income level. High earners can generally afford to allocate more toward discretionary purchases.
Debt. Debt can hold you back from reaching your financial goals. For those of us who have debt — and particularly high-interest debt like credit cards — it’s a good idea to spend less on discretionary purchases in order to pay off debt faster.
Your values. What do you value in life? Are you genuinely enjoying your optional spending, or are you just trying to keep up with the Joneses? Ask yourself these hard questions to evaluate your spending from the top down.
Ultimately, the amount to allocate for discretionary spending really depends on your values and preferences in life — as well as on your income level and financial means.
If you want to live debt-free or retire early, think about lowering your discretionary spending. If you want to splurge and enjoy the finer things in life without guilt, you may wish to allocate more to discretionary categories.
For everyone else, landing somewhere in the middle may work best. Finding the sweet spot that allows you to enjoy nice things while still saving money is a good goal to aim for.
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