What is a Discretionary Expense
A discretionary expense is a cost that is not essential for the operation of a home or a business. For example, a business may allow employees to charge certain meal and entertainment costs to the company in order to promote goodwill with employees. In the home, discretionary expenses are most often defined as things that are "wants" rather than "needs."
BREAKING DOWN Discretionary Expense
Individuals and businesses pay for discretionary expenses with discretionary income. This figure is the amount of money left over after paying for taxes and necessities. A person with no money remaining after paying bills has no discretionary income; therefore, to pay for discretionary expenses, this person must incur debt. Financing a vacation by using a credit card is an example of taking on debt for a discretionary expense.
Essential Expenses Vs. Discretionary Expenses
Households incur two types of expenses. Certain expenses they must either pay by law (such as taxes and health insurance) or pay to keep the household running (such as rent, food, and transportation costs). These expenses are essential expenses, as the income earner does not have the option of not paying them in any given month without incurring consequences.
Other expenses, such as vacation costs and luxury items, are not necessary to maintain a household and, thus, are classified as discretionary expenses. In other words, the income earner can pay for these goods or services at his own discretion.
Why Discretionary Expenses Matter
In tough economic times, it may be necessary for households and businesses to cut expenditures in response to decreases in income. Thus, it is often desirable to track discretionary expenses separately from essential expenses so that it is easy to see where and to what degree expenses can be reduced.
One helpful budgeting tactic is to rank discretionary expenses in order of importance from the least to most important. Therefore, if a job loss or income reduction forces household budget cuts, household members can easily identify the first discretionary expense to place on the chopping block.
The concept of what is discretionary is subjective and may differ considerably among individuals and businesses. For example, consider a family with two vehicles that both carry car payments. The family considers both cars necessities but if needed can get by with one vehicle. If times get tough, the family may reclassify the second car as a discretionary expense and sell it to get out from under the payment.