What is Discretionary Spending Within a Budget?
Setting up and following a budget is an essential part of financial success. Discretionary expenses are non-essential, unlike those for things like housing and insurance.
Updated on Jan 24 2020
Setting up and following a budget is an essential part of financial success. Discretionary expenses are non-essential, unlike those for things like housing and insurance. It’s money you can spend on dining out or other niceties because it’s left over after you pay your essential bills.
Discretionary spending depends, of course, on your income. A good budget includes fixed expenses like your mortgage, health insurance payments, and cell phone bill, and then other categories that you have budgeted for, such as groceries and miscellaneous household items (toilet paper, toothpaste, shampoo, etc.). The money that is left over is your discretionary income. You can treat your discretionary income almost as an allowance. It’s money that you can use however you please.
What should I budget?
In short, everything. Budgeting is an essential tool for financial success, but how you set up your budget is up to you. Regardless, it’s important to understand how discretionary spending fits in with your financial goals.
The Balance provides us with a chart of discretionary expenses you can see here. Expenses include cable, dining out, subscriptions, clothing, beauty products, holidays and gifts, and other miscellaneous categories. Often times, we don’t realize how much we are spending on discretionary items until we have everything listed out. If you are feeling like you need to save more money, it helps to take a look at your spending and see where extras can be cut.
Remember, it’s important to have discretionary or “fun” income in your budget. Not having room to go out to eat with friends or watching Netflix as part of your downtime to unwind can cause undue stress. And, as Dave Ramsey points out, if you don’t budget for some fun money, you’ll likely spend it anyway.
Example of discretionary spending in a real-life scenario
Let’s say that an individual brings home $5000 a month net pay. After expenses such as housing, utilities, savings, and other bills including groceries and household items, she has $1500 leftover. This $1500 dollars is her discretionary spending. This money can be spent on leisure goods, eating out, or maybe excess vacation spend. The best part about budgeting in discretionary income is that there doesn’t have to be guilt involved in the spending. Your savings, retirement, and other necessary costs have already been taken care of—leaving you with room to buy what you want. Many people describe this as their “fun” money or allowance. However, be mindful that you don’t budget for too much fun money–make sure that you are saving and investing enough in order to have a successful retirement.
Other types of discretionary budgeting
For others, discretionary spending may be a little more specific. Dave Ramsey says that fun money is money that’s accounted for after you budget for some discretionary categories like going out to eat or entertainment. “Fun money often gets lumped into one of a few categories: your entertainment fund, your restaurant fund or even your miscellaneous fund. It’s none of these. It’s a separate amount to spend however you want, whenever you want. The beauty of pocket money is you don’t know what you’re going to buy with it yet. You can use it as the mood strikes you, without guilt.”
A zero-based budget, also coined by Dave Ramsey, is a budgeting method where every single dollar is accounted for. This means that if you subtract the amount of money you spend throughout the month by your monthly income (or biweekly, or yearly, however you want to organize it), the amount is zero. If getting this granular appeals to you, then this method works very well to pay down debt, save money, and know where your discretionary spend is going.
Budgeting for discretionary expenses helps you see the big picture
Knowing what discretionary spend is and how to budget for it will help you reach your financial goals. When we are looking for ways to cut down on expenses, discretionary spending will provide a clear picture of non-necessities you can cut. It also can provide a sense of relief, since you know that you have accounted for that latte every Friday. If you know how much money you can spend on dining out or clothing for the month, you can make fun purchases without worrying if you are saving enough.
As always, financial advisors are here to help. They can set up a budget for you, see what discretionary spend you can cut, and where you have some wiggle room.
Find an Advisor Near You
Advisors by City
Find advisors located in the cities nearest you.
Need a financial advisor?
100% free consumer service