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Understanding and Managing Discretionary Spending

Budgeting is a crucial step in developing a strong financial plan. While it’s essential to prioritize saving for the future and paying off debt, it’s also important to allocate some money for an enjoyable lifestyle. Whether you’re creating a budget for the first time or evaluating your existing approach, the right amount to budget for discretionary spending depends on your income, other expenses, and financial goals. Being prepared for “fun” spending can help you feel less constrained and make it much easier to stick to your budget.

What Is Discretionary Spending?

Discretionary spending includes all nonessential expenses. These costs aren’t necessary for your and your family’s basic needs. Essential expenses such as rent, utilities, groceries, and debt payments are not considered discretionary spending.

Examples of Discretionary Expenses

Common types of discretionary spending include:

• Streaming service subscriptions
• Dining out, takeout, and food delivery
• Gym memberships
• Concert and event tickets
• Vacations
• Coffee shop purchases
• Hobby-related costs
• Books
• Electronics
• Jewelry
• Charitable contributions

Note that some essential expenses can also become discretionary if you spend more than what’s required for your basic needs. For example, extra spending on snacks, fine dining, expensive clothing brands, or vehicle upgrades can be considered discretionary expenses.

How Much Should You Budget for Discretionary Spending?

The amount you should budget depends on your income, expenses, and financial goals. If your income is low or you have significant debt payments, it might make sense to cut back on discretionary spending to increase your ability to save or pay down debt. Conversely, if you have a higher income, you may afford to spend more on your lifestyle.

Consider the 50/30/20 Approach

If you’re unsure where to start, consider using the 50/30/20 budget approach as your guide:

• Spend 50% of your monthly income on necessities.
• Spend 30% on discretionary expenses.
• Allocate 20% toward debt payments and savings or investment goals.

You don’t have to stick to these exact proportions, but the 50/30/20 approach provides a framework that you can customize based on your situation. If you have a lot of debt or ambitious savings goals, you may want to increase that percentage and reduce your discretionary spending. Also, if your basic expenses don’t take up half your monthly income, you may have more freedom with the other two categories.

How to Reduce Discretionary Spending

If you’re spending too much on nonessential expenses, cutting back can help you meet your basic needs, save more, and pay down high-interest debt. Here are some steps to achieve your goal:

Track Your Spending

Review your expenses for the past three months and categorize each one to understand where your money is going. This can help you pinpoint the best ways to reduce nonessential spending.

Cut Back on Unused Subscriptions

Identify monthly subscriptions you aren’t using regularly and cancel them. Consider keeping one streaming subscription active at a time and switching between services based on what you’re watching.

Reduce Other Recurring Costs

If you have a gym membership you don’t use or a subscription to a food delivery app, consider whether you can benefit from the savings by canceling them.

Prepare for Impulse Spending

While occasional unplanned purchases are fine, frequent impulse buying can wreck your budget. Stick to your shopping list at the grocery store and add online items to a wish list, revisiting them after a few days to decide if you still want them.

Find Cheaper Ways to Maintain Your Lifestyle

Look for ways to maintain your lifestyle while cutting costs. For example, share streaming subscriptions with friends or family, or get a membership to your local library instead of buying new books.

Also, don’t be afraid to look for waste in your essential expenses. Shop around for auto insurance annually and consider adjusting your home’s temperature to save on utilities.

Build and Maintain Good Credit to Minimize Costs

Your credit score can indirectly affect your discretionary spending, especially if high debt payments result from higher interest rates. Review your credit score and report to evaluate your credit health and look for opportunities to improve your score over time. With good credit, you may be able to refinance or consolidate debt at a lower interest rate, freeing up more cash flow for other financial goals and discretionary spending.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals with confidence.

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