Discretionary vs Non-Discretionary Expenses Explained
There are two main expense categories, discretionary vs non-discretionary. Some expenses are necessary while others are not.
To differentiate discretionary and non-discretionary expenses, you need to distinguish between a want and a need.
A need is a necessity while a want is not. It all means that it is an expense you cannot do without to survive.
As you plan your finances and work towards your financial goals, it’s crucial to have a good idea of your overall expenses. This knowledge will help prepare a budget that will help you save and invest accordingly.
A discretionary expense is a cost that a household or a business can survive without, if necessary.
Discretionary expenses are costs incurred above what is considered essential. Such expenses are wants and are more about your choices and lifestyle.
Types Of Discretionary Expenses
As mentioned above, discretionary expenses are not necessarily needed to maintain a household. These include:
Any cost incurred in a regular activity done for one’s leisure time or pleasure is a discretionary cost, including:
2. Vacation And Unplanned Travel Expenses
Vacation expenses are costs incurred on holiday trips and weekend getaways.
Money spent on luxury is discretionary. However, luxuries are unique to each individual. Example include:
- Restaurants and other entertainments
- Coffee and other beverages
Non-discretionary, needs or necessary expenses are mandatory expenses needed to survive and keep your household running. Therefore, paying these expenses is non-negotiable.
Related post: Are You Living Beyond Your Means? 4 Signs To Watch
Types Of Non-Discretionary Expenses
1. Living Expenses
Living expenses include day to day expenses such as:
- Utility bills
- Clothing – however, spending your money on high-end fashion items you don’t really need becomes a discretionary expense.
Any loan or credit taken that you’ll need to pay for the principal amount plus interest is considered non-discretionary, including:
- Credit card
- Car loans
- Student loans
- Personal loans, including loans from digital lenders, Sherlocks and payday lenders
It is essential to have money set aside for annual taxes because taxes fluctuate as you age. These taxes include income taxes and capital gains.
4. Insurance And Health Care
You need to account for insurance payments and emergency health care visits because these costs tend to rise faster than inflation and can be a significant expense as you age.
Budgeting For Discretionary And Non-Discretionary Expenses
It would be best if you had a clear understanding of all your living expenses to plan for your future. Many people spend more than they earn and get into debt mostly because they don’t have a grip on their spending.
Understanding discretionary and non-discretionary costs can help you prepare for a successful financial future.
When there is a decrease in income, you may need to cut back on certain expenditures. Therefore, you should track discretionary expenses separately from non-discretionary ones so that you can quickly see how to reduce specific cost categories.
The best budgeting tactic is to rank discretionary expenses in order of importance from the least to most important. If there is a budget cut due to job loss or income reduction, you can quickly identify discretionary expenses to reduce.
Understanding discretionary and non-discretionary expenses is good for budgeting. Nevertheless, keep in mind that what constitutes a discretionary expense may differ between individuals. For instance, a car could be a discretionary expense for you, whereas it is necessary for someone else, especially if they have long commutes or travel a lot for work.
The goal is to determine which of your expenses lie in both categories and manage them not to jeopardise your journey to financial success.