What Is Discretionary Spending? Examples

What does discretionary expense mean?

When a person or business buys something nonessential, this is a discretionary expense. We are all familiar with categorizing purchases as ‘needs’ and ‘wants’. For example, you may want the new iPhone but do not need it. On the other hand, you need food and rent. Discretionary expenses are wants.

Let’s say you are a tech junkie who loves standing in line for the latest iPhone. Unless your current phone is cracked and useless, buying the new edition is a discretionary expense. It makes you feel good but is not necessary for survival. In contrast, if a company needs to hire a business attorney in California, the attorney’s fee is not a discretionary spending.

Discretionary spending refers to the part of a persons budget that is set aside for non-essential purchases. Things that aren’t necessary for basic living. Unlike mandatory expenses like rent, utilities or groceries discretionary spending covers the fun stuff. Things we do or buy purely for enjoyment and personal luxury. This can include dining out going on vacations indulging in luxury items pursuing hobbies and treating ourselves to entertainment like movies or concerts.

Discretionary spending is often the area people consider cutting back on when trying to save money or manage their budget more effectively because these expenses aren’t essential for day to day survival. Keeping an eye on spending is important, for maintaining financial well being since overspending in this category can lead to financial strain or accumulating debt.

What are examples of discretionary spending?

Discretionary expenses aren’t essential for a person to be alive. Discretionary spending certainly enhance the quality of your life. Discretionary spending encompass a range from small indulgences, to more extravagant treats. The following are some examples of discretionary expenses:

• Art and Craft Supplies
• Books and Magazines
• Charitable Donations
• Cinema and Theatre Tickets
• Concerts and Live Events
• Dining Out and Takeaways
• Electronics and Gadgets
• Fashion and Clothing
• Fitness Classes
• Garden and Home Décor
• Gifts for Special Occasions
• Gourmet Foods and Specialty Drinks
• Gym Memberships
• Hobbies and Club Memberships
• Holiday Decorations
• Home Improvement Projects
• Jewelry and Accessories
• Luxury Goods
• Meal Kit Subscriptions
• Music and Streaming Services
• Non-Essential Groceries
• Personal Care Products
• Pet Treats and Toys
• Photography Equipment
• Recreational Equipment
• Salon and Spa Services
• Subscription Boxes
• Travel and Vacations
• Video Games and Consoles
• Wine and Spirits

Even the federal government has a discretionary spending budget.

Why is discretionary spending important?

The national economy is composed of individuals and households that contribute to growth by spending. Some purchases are necessary for survival, such as food, clothing, and housing. But most modern purchases are considered discretionary expenses.

When an individual receives their income, whatever is left over after making necessary purchases is considered discretionary income. This money can be either saved or spent on services and goods. The decision is up to the individual or household. Let’s say a person makes $5000 a month. They spend $4000 on necessary expenses like rent, groceries, and healthcare. The remaining $1000 may be used at their discretion. This means they can spend it on a new television, a vacation, or they can put it into their savings account.

Expenses are required by law, while others are needed for survival. These expenses include insurance, rent, transportation, food, and taxes. Typically, an individual has no choice but to pay for these things. Any other purchases fall under discretionary expenses. These include luxury goods and vacations. However, they also include mundane things like haircuts and furniture.

According to the principles of microeconomics, necessary purchases are considered price inelastic. This means no matter how expensive they become, people are still going to pay for them. For example, if eggs cost $6 per carton, people are still going to need eggs for breakfast. By contrast, discretionary expenses are viewed as price elastic. This means that if the price of discretionary items rises, an individual can choose not to buy them. For example, in a recession, people will be less likely to buy expensive television sets or the latest smartphone. They are more concerned about losing their jobs than acquiring the brand-new PlayStation.

Discretionary expenses also apply to businesses. For example, a business requires a good Internet connection for cloud storage and operations. This would be regarded as a necessary expense. However, a retail store may not need the Internet. For them, Internet would be a discretionary expense. That is to say, what is a discretionary expense for one company may be a necessary expense for another.

In the event of an economic downturn, companies will cut discretionary expenses first.

Certain investments, such as mergers and acquisitions, qualify as discretionary expenses for businesses. The purpose of these expenses is to encourage the growth of a business. When times are hard. Businesses can afford to exist without mergers.

If a company focuses on selling discretionary products for services, its sales will fluctuate over time. These may be classified as cyclical businesses. When there is a recession, discretionary products and services have less demand. Companies that sell luxury products are required to budget carefully so that they can weather bad spells. It is important that they avoid taking on too much leverage.

There are two types of leverage:

When a company accepts more fixed costs than variable costs, operating leverage is applied. This increases the impact of revenue increases and decreases.

When a company takes on more debt, financial leverage is applied. This boosts the impact of revenue increases and decreases.