Discretionary Expense

Key takeaways
* A discretionary expense is a non-essential cost—something you can forgo without jeopardizing daily operations or basic living needs.
* Discretionary expenses are funded by discretionary income: money left after paying necessities (housing, food, taxes, insurance).
* Tracking and ranking discretionary spending makes it easier to cut back during financial strain.
* What counts as discretionary can vary by person or business—for some, certain items may be necessities.

What is a discretionary expense?

A discretionary expense is a want rather than a need. It includes goods and services that enhance lifestyle or comfort but aren’t required to maintain basic functioning. Examples include vacations, dining out, luxury items, entertainment, and hobby-related spending.

How discretionary expenses work

Individuals and businesses first cover non-discretionary (essential) costs—rent or mortgage, utilities, taxes, basic groceries, payroll, and core operating expenses. Money remaining after those obligations is discretionary income, which can be spent or saved at the owner’s discretion. During downturns or cash-flow problems, discretionary expenses are typically the first area cut because removing them has minimal immediate operational impact.

Common examples

• Vacations and travel
• Dining out, entertainment, specialty beverages (coffee shops)
• Luxury goods and electronics
• Hobbies, gym memberships, sports and craft supplies
• Automobiles (may be discretionary or essential depending on circumstances)
• Alcohol and tobacco

Special considerations

What’s discretionary for one person or company might be essential for another. A new business may need ongoing advertising to survive, whereas a mature company might temporarily cut marketing. A car is discretionary for someone with alternatives but essential for a long commuter with no transit options. Context and individual circumstances determine which expenses are truly discretionary.

How to budget for discretionary expenses

• Track separately: Record discretionary and non-discretionary spending in separate categories so cuts are easy to identify.
• Rank priorities: List discretionary items from least to most important; this clarifies what to reduce first if income drops.
• Set a cap: Allocate a fixed portion of income to discretionary spending (many people use budgeting rules like 50/30/20 as a starting point: needs/wants/savings).
• Use envelopes or sub-accounts: Physically or digitally separate funds meant for non-essentials to avoid overspend.
• Review regularly: Reassess what you consider discretionary as life changes (new job, relocation, growing family).

Discretionary vs. non-discretionary vs. fixed expenses

• Discretionary expenses: Non-essential, variable, and chosen (e.g., vacations, dining out).
• Non-discretionary expenses: Essential costs required to maintain living standards or operations (e.g., housing, basic groceries, essential healthcare, taxes).
• Fixed expenses: Regular, predictable costs that are often essential (e.g., rent, insurance premiums). Some fixed costs can be non-discretionary; others may be negotiable over time.

Discretionary funds and discretionary income

• Discretionary income: Income remaining after paying necessities (housing, food, taxes, utilities). This is the pool used for wants, savings, or debt repayment.
• Discretionary funds: The actual money set aside for non-essential spending—used by households, businesses, or governments for non-core projects or extras.

Quick FAQs

Q: Is a car a discretionary expense?
A: It depends. If it’s essential for commuting or work with no alternative, it’s non-discretionary; if it’s a second or luxury vehicle, it’s discretionary.

Q: Are groceries discretionary?
A: No—basic groceries are generally non-discretionary. Dining out or premium groceries may be discretionary.

Q: Should I ever cut all discretionary spending?
A: In severe financial strain, cutting most discretionary spending stabilizes finances. Prioritize essentials first, then reduce or pause non-essentials while keeping a plan to restore balanced spending.

Bottom line

Discretionary expenses are non-essential costs funded by money left after essentials are paid. They’re flexible and the most adjustable part of a budget, so tracking and prioritizing them helps individuals and businesses respond quickly to changing financial conditions and meet savings or debt-repayment goals.