# Discretionary Expense Definition, Examples, and Budgeting

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*— Investopedia / NoNo Flores*

> **Definition**
>
> A discretionary expense is a non-essential cost that individuals or businesses can forego without significantly impacting their day-to-day operations or survival.

## What Is a Discretionary Expense?

A discretionary [expense](https://www.investopedia.com/terms/e/expense.asp) is a non-essential expense. Discretionary expenses are costs without which businesses or households can survive. As such, they are defined as being wants rather than expenses that are needed. This means a business or household is still able to maintain itself even if all discretionary [consumer spending](https://www.investopedia.com/terms/c/consumer-spending.asp) stops. Meals at restaurants and entertainment costs are examples of discretionary expenses.

### Key Takeaways

*   A discretionary expense is a cost that is not essential for the operation of a home or a business.
*   Discretionary expenses for businesses are usually linked with improving a company’s reputation among its customers and employees.
*   Tracking discretionary expenses enables businesses and households to identify where they can save money in times of financial difficulties.
*   Discretionary expenses vary depending on the business or person.

## Understanding Discretionary Expenses

Expenses are divided into several categories, namely non-discretionary and discretionary. While non-discretionary expenses are considered mandatory—housing, [taxes](https://www.investopedia.com/terms/t/taxes.asp), [debt](https://www.investopedia.com/terms/d/debt.asp), and groceries—discretionary expenses are 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. Rather, they cater to choice and lifestyle.

Businesses and individuals pay for discretionary expenses with [discretionary income](https://www.investopedia.com/terms/d/discretionaryincome.asp)—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](https://www.investopedia.com/terms/l/luxury-item.asp) and other services—cars, vacations, restaurants, entertainment, electronics, etc.

When times get tough and short-term [cash flow](https://www.investopedia.com/terms/c/cashflow.asp) issues emerge, managers and individuals often try 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.

Corporate discretionary expenses are usually linked to the promotion of a company’s [market](https://www.investopedia.com/terms/m/market.asp) position. Buying the [raw materials](https://www.investopedia.com/terms/r/rawmaterials.asp) used to produce goods is usually considered essential. Spending money on employee training programs is not usually considered essential. Individuals may also find times when they need to consider cutting out certain expenses. For example, a person who runs into financial difficulties is more likely to prioritize paying utility bills over financing a vacation.

> **Important**
>
> Understanding and identifying your non-discretionary and discretionary expenses—and which ones matter most to you—can help you save, set your goals, and plan for your financial future.

## Special Considerations

What constitutes a discretionary expense is subjective. As such, it may differ considerably among individuals and businesses.

For example, a stable, well-established company could probably get away with slashing its [advertising](https://www.investopedia.com/terms/a/advertising-costs.asp) budget for a while if the need arises. A new company facing hardship, on the other hand, would probably need to make [cutbacks](https://www.investopedia.com/terms/c/cost-cutting.asp) elsewhere, being mindful that boosting exposure and getting its name out there is imperative to keeping the business afloat.

The same principle applies to individual consumers as well. Some people may only be able to afford a daily Starbucks run when things are going well. They may consider cutting out this expense when times are tough—or if they're saving up for a big expense, like a home or a car.  

## Types of Discretionary Expenses

As mentioned above, discretionary expenses are any costs that a consumer or business wants rather than needs. Some common discretionary items include:

*   Vacations and travel expenses
*   Automobiles
*   Alcohol and tobacco
*   Restaurants and other entertainment-related expenses
*   Coffee and specialty beverages
*   Hobby and sports-related expenses, such as crafting, sewing, and gym memberships

It's important to point out again that what defines a discretionary expense depends on who's doing the buying. For instance, buying a new car may be considered a want for one person, but it may be considered essential for someone who has a long [commute](https://www.investopedia.com/terms/c/commutingexpenses.asp) to work where driving is the only option.

## How to Budget for Discretionary Expenses

It may be necessary for households and businesses to cut back on certain expenditures in response to decreases in [income](https://www.investopedia.com/terms/i/income.asp) during tough economic times. That's why it's a good idea to track discretionary expenses separately from essential ones so that it is easy to see how costs can be reduced.

One helpful budgeting tactic is to rank discretionary expenses in order of importance from the least to most important. If a job loss or income reduction forces [budget](https://www.investopedia.com/terms/b/budget.asp) cuts, household members or a company's management team can easily identify the first discretionary expense to place on the chopping block.  

## Discretionary Expenses vs. Non-Discretionary Expenses

Expenses are divided into discretionary and non-discretionary costs. In other words, essential and non-essential expenses. Some expenses, such as vacation costs and [luxury items](https://www.investopedia.com/terms/l/luxury-item.asp), are not necessary to maintain a household and, thus, are classified as discretionary expenses. The income earner can pay for these goods or services at their discretion.

Certain expenses, though, must be paid to keep things running. These are called non-discretionary expenses. These are considered essential expenses, as the income earner must regularly pay them or suffer the consequences.

Examples of non-discretionary spending include housing costs, taxes, and [health insurance](https://www.investopedia.com/terms/h/healthinsurance.asp) for individuals. [Payroll](https://www.investopedia.com/terms/p/payroll.asp), warehousing costs, and transport are non-discretionary expenses for businesses.

## What Are Discretionary Funds?

Discretionary funds is a term used to describe the money an individual or business has left over to spend on non-essential goods and services. This money is left over after an individual, household, or organization pays for essential costs. For instance, governments may use discretionary funds for small-scale projects after taking care of all essential services.

## What's the Difference Between Discretionary and Fixed Expenses?

Discretionary expenses are expenses paid for by individuals or businesses that aren't essential to their day-to-day lives or operations. These costs may not be predictable and can change over time. Fixed expenses, on the other hand, are costs that are incurred regularly. These are predictable, which means households and businesses can count on them being the same (or roughly the same) each period. Examples of fixed costs are housing and rent, insurance, and utilities.

## What Does Discretionary Income Mean?

The term [discretionary income](https://www.investopedia.com/terms/d/discretionaryincome.asp) refers to the total income left after a household or business pays for necessities, including taxes, housing, groceries, and utilities. This type of income is used to maintain a certain [standard of living](https://www.investopedia.com/terms/s/standard-of-living.asp) or operations. As such, discretionary income can be used to pay for things like vacations, luxury items, and savings.  

## The Bottom Line

Costs are divided into several categories. Some are essential while others are not. The first, which includes essential and mandatory items, are called non-discretionary expenses. This is contrasted to discretionary expenses. These costs are deemed non-essential, such as vacations, luxury goods, and nights out. Discretionary spending happens when all non-discretionary costs are covered. Keep in mind that these are needs and can be sacrificed when times get tough.  

> **Article Sources**
>
> 1.  Experian. "[What Is Discretionary Spending?](https://www.experian.com/blogs/ask-experian/what-is-discretionary-spending/)"