When payday comes, chances are you've already allotted the money for a handful of expenses. Not all expenses are created equal, however. Some, like your mortgage and utilities, are essential. Others are fun and make life more fulfilling, but aren't essential—they're discretionary. Understanding the difference between necessary and discretionary expenses can help you budget and more effectively manage your finances.
A budget includes all of your monthly expenses, and it's a way of comparing how much money you spend with how much you make. Keeping a budget allows you to see whether you're spending more than you earn, and helps you take steps to change things if you are. When you make a budget, you can break your costs into two categories: necessary expenses and discretionary expenses.
Necessary expenses include the non-negotiable costs you need to cover each month, such as:. Discretionary expenses , on the other hand, are the nice-to-haves.
You can think of discretionary expenses as quality-of-life purchases. They're purchases that are important to leading a satisfactory life, but that you could go without if push came to shove. Discretionary expenses include a broad range of costs and purchases, and the amount you spend in this category can vary greatly from month to month.
Without a budget that tracks your fixed and discretionary expenses, these costs can run together and cause you to lose sight of how your spending aligns with your income. If you spend too much on discretionary items and don't leave enough room for your necessary expenses, you could miss payments and risk harm to your credit , or worse.
But remember: Just because an expense is non-essential doesn't mean it's not important. For instance, your gym membership may be integral to your physical and mental health. A budget helps you see exactly what your finances look like, and it allows you to adjust your lifestyle expenses as needed to manage your money, build savings and avoid debt. Why You Should Track Discretionary Expenses It's important to look over your discretionary expenses because getting clear on where your money goes provides a roadmap toward reaching your financial goals.
They are also the lowest-hanging fruit when it comes to saving money if your financial situation changes, or you'd like to spend more elsewhere. When you list out your discretionary costs, think about how important they are to you and whether they add much to your life. You may find some superfluous expenses and consider eliminating them, but the goal in identifying and prioritizing your discretionary purchases isn't necessarily to minimize your "fun" spending.
Develop and improve products. List of Partners vendors. A discretionary expense is a cost that a business or household can survive without, if necessary. Discretionary expenses are often defined as nonessential spending. This means a business or household is still able to maintain itself even if all discretionary consumer spending stops.
Meals at restaurants and entertainment costs are examples of discretionary expenses. Expenses are divided into several categories, namely non-discretionary and discretionary.
While non-discretionary expenses are considered mandatory—housing, taxes , debt , and groceries—discretionary expenses are any costs incurred above and beyond what is deemed necessary. These are generally considered wants, while non-discretionary expenses are usually referred to as needs. As such, discretionary expenses rarely have anything to do with a business or household's day-to-day operations and, instead, have to do with lifestyle and choice.
Businesses and individuals pay for discretionary expenses with discretionary income —the amount of money left over after paying for housing, food, taxes, and other necessities. When times are good, people have more money to spend, and they normally do so on things they don't need, such as luxury items and other services—cars, vacations, restaurants, entertainment, electronics, etc.
When times get tougher and short-term cash flow issues emerge, managers and individuals will first look to weed out any unnecessary costs. Discretionary expenses are normally the first to go because stopping them is unlikely to have a major impact on a business or household.
Buying the raw materials used to produce goods is usually considered essential. Spending money on employee training programs is not usually considered essential. Individuals may also encounter moments when it is necessary to consider which of their expenses they can live without. For example, a person who runs into financial difficulties is more likely to prioritize paying utility bills over financing a vacation.
As mentioned above, discretionary expenses are any costs that a consumer or business wants rather than needs. And for most businesses, this is a huge challenge. Discretionary spending is more difficult to control than essential spending since it changes frequently. Another advantage of budgeting is that it helps you to plan ahead for discretionary costs later in the year.
However, just because these costs CAN be reduced does not indicate they are unneeded in the first place. Many, if not all, can be decreased only in the near term, not in the long run. You could definitely get by for a month without promoting or offering any employee training.
Maintaining existence without them, on the other hand, can destroy a firm just as effectively as excessive spending. Consider it similar to coffee. You can certainly stop buying coffee for your office and no one will die as a result. At first, yes. Then your under-caffeinated staff may accidentally kill each other, and the business as a whole.
Discretionary spending, on the other hand, fluctuates a lot more than essential spending. The cost of your entire pay is pretty predictable; but, marketing campaigns and travel expenses are far more erratic. All of this makes managing discretionary spending even more difficult. Discretionary spending applies to costs and expenses that are non-essential.
But this distinction should be looked at literally. For example, even though most companies know they need to advertise, whether or not they end up paying for advertising is at the discretion of the Chief Marketing Officer or CEO. So to be clear, discretionary expenses are optional. On the other hand, costs like rent, salaries, and certain insurances are essential. You are legally obliged to pay these each month. But first it might help to see some costs that are not optional. The difference here is pretty clear.
In fact, many of these costs really do need to be paid if you want to have any kind of long-term success. Marketing is a classic example of something that is discretionary but not optional. But what makes most marketing a classic discretionary expense is just how variable it can be. You can choose to attack entirely new strategies from quarter to quarter. Discretionary marketing costs include:. That's just a quick list. So how can you know which marketing strategies to devote resources to?
According to Tim Brown of Hook Agency , the key is to look at your current clients:. Then double down on the approaches that work. Find the events, websites, and social sites where they spend their time — and push your efforts into that first. If your business finds itself in a particularly strong position, it might be time to make a few investments.
These are quite clearly not essential expenses - most companies never have these kinds of opportunities.
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