Discretionary Spending

What Is Discretionary Spending?

Discretionary spending is spending on any expenses that are not necessary for an organization or household to function correctly. 

They are luxury purchases referred to as non-essential spending. Businesses and households will still be properly run if all such spending ceases.

In the workplace, discretionary expenses are associated with the public perception by its customers or employees.

They vary from business to business and from individual to individual.

It is essential to keep track of discretionary spending to give an idea of areas where it is possible to cut costs when efforts are being made to save money, e.g., in times of financial constraints.

Deeper Definition

Consumer or business spending is generally classed as discretionary or non-discretionary (staple, mandatory). 

The non-discretionary spending includes housing, food, medication, personal care, hygiene products,  taxes, debts, utilities, and groceries. The discretionary ones are the excesses that come to mind after satisfying the basic requirements, including luxury items, travel, and entertainment like vacations, alcohol, hobbies, sports-related expenses, fancy club memberships, etc.

Discretionary spending is referred to as ‘wants’ while non-discretionary ones are the ‘needs.’

Discretionary spending is majorly informed by lifestyle and choices. It is funded majorly by disposable or discretionary income, the amount of money remaining after basic needs have been met.

Discretionary spending depends on the prevailing economic situation; as such, the purchase of luxury items and services by individuals, including entertainment, vacations, gadgets, are more likely when the economy surrounding them is very comfortable.

In periods of austerity, discretionary expenses are immediately discarded as the absence of the goods or services they provide is unlikely to impact the business or household in question significantly.

In the corporate environment, discretionary expenses are linked with promoting a company’s standing in the market.

Procurement of raw materials and recurrent expenditure like salaries and other running costs are usually considered essential.

Discretionary Spending Example

If someone earns $5,000 per month and the necessary expenses cost $2,500. The $2,500 remaining can be used for discretionary spending- for pleasure or leisure purchases, e.g., dining out, seeing movies, taking vacations, etc.