A discretionary expense is a cost that a business or household can live without if necessary. These expenses are often nonessential, meaning the business or household remains operational even if all discretionary spending ceases.
Examples of discretionary expenses include dining out at restaurants and entertainment costs.
Key Takeaways
- A discretionary expense is a cost that is not essential for running a home or business.
- In a corporate environment, discretionary expenses are typically tied to enhancing a company’s image among customers and employees.
- Tracking discretionary expenses provides insight into potential savings opportunities during tough financial times.
- The nature of discretionary expenses varies based on individual or business needs.
Gaining Financial Insight Through Discretionary Expenses
Expenses fall into two primary categories: non-discretionary and discretionary. Non-discretionary expenses are necessities—such as housing, taxes, debt, and groceries—essential for daily operations. By contrast, discretionary expenses are costs incurred above fundamental needs. They usually pertain to lifestyle choices rather than essential functions.
Both businesses and individuals use discretionary income, which is the remaining money after essential expenses, to pay for discretionary expenses. During prosperous times, people may splurge on luxury items and services such as vacations, dining out, and electronics. When financial constraints arise, cutting discretionary expenses is often a first step.
In a business context, discretionary expenses may be related to marketing and company image enhancement rather than essential operations like raw material procurement. On a personal level, discretionary expenses might include non-essential items like vacations, new cars, or hobbies.
Examples of Discretionary Expenses
Discretionary expenses cover a wide range of items and services desired rather than needed. Some common examples include:
- Vacations and travel
- Automobiles
- Alcohol and tobacco
- Dining at restaurants
- Entertainment activities
- Specialty beverages like coffee
- Hobbies and sports-related expenses
The distinction between discretionary and non-discretionary can vary based on the individual’s or business’s situation. For instance, while a new car might be a luxury for some, it could be essential for someone with a long, unavoidable commute.
Discretionary vs. Non-Discretionary Expenses
Expenses are divided into two types: essential (non-discretionary) and non-essential (discretionary). Discretionary costs, like vacations and luxury items, are non-essential. The primary income earner can decide at their discretion whether to incur these expenses.
Essential expenses, on the other hand, are non-negotiable costs necessary to maintain operations, such as housing, taxes, health insurance for individuals, and payroll for businesses. Identifying and prioritizing these costs is crucial for financial health.
Special Considerations
Discretionary expenses are inherently subjective and can greatly differ among individuals and businesses. For example, while a well-established company may cut its advertising budget during hard times, a new business might need to retain it to stay afloat. Similarly, individual consumers might forego small daily luxuries when budgeting for significant purchases.
Budgeting for Discretionary Expenses
It’s prudent for households and businesses to track discretionary expenses separately from essential ones. Ranking discretionary costs in order of importance can streamline decision-making during economic hardships.
During times of financial stress, identifying the least critical discretionary expenditures allows for easier budget adjustments, ensuring continued financial stability.
By understanding and managing discretionary expenses, individuals and businesses can make informed decisions that enhance their overall financial well-being, offering a path to greater financial freedom and security.
Related Terms: discretionary income, non-discretionary expenses, financial planning, budget cuts, financial difficulties.
