Definition
A discretionary expense refers to costs that are not essential for the maintenance of a home or business. These are often optional costs or those related to non-essential goods and services, and can be adjusted or eliminated depending on one’s financial situation. Examples could be money spent on vacations, dining out, or luxury items.
Phonetic
The phonetic transcription of “Discretionary Expense” is: /dɪˈskrɛʃəˌnɛri ɪkˈspɛns/
Key Takeaways
- Definition: Discretionary expenses refer to nonessential spending or items that individuals might purchase when they have more disposable income. These could include luxury items, vacations, entertainment and more. They are often considered flexible as they can be adjusted according to one’s financial situation.
- Financial planning: Discretionary expenses tend to be the first areas to cut back on when budgeting or financial planning, due to its non-essential nature. It is important to keep track of these expenses to maintain a healthy financial status and avoid overspending.
- Economic indicator: The level of discretionary expenses can provide some information about the overall state of the economy. When the economy is doing well, discretionary spending tends to increase, as people feel more secure and confident to spend on non-essential items. On the contrary, in an economic downturn, discretionary spending often decreases.
Importance
Discretionary expenses are a key concept in business and finance as they represent the non-essential expenses a company or individual incurs, such as for travel, entertainment, or marketing. These costs can be adjusted or eliminated based on financial circumstances, which is different from fixed expenses like rent or salary that can’t be easily changed. Therefore, understanding and effectively managing discretionary expenses is important for maintaining budget integrity and financial health. In times of financial distress, reducing these costs can help a business stay afloat, and in prosperous times, they can be safely increased to stimulate growth or satisfy stakeholders. Thus, tracking discretionary expenses offers a flexible tool to control overall financial performance and stability.
Explanation
The purpose of discretionary expenses in finance and business revolves around enhancing the functionality, efficiency, and overall comfort of a business’ operation or an individual’s lifestyle. These are non-essential expenses, meaning they are not necessary for maintaining the fundamental running of a business or the basic livelihood of an individual. Discretionary expenses include costs related to travel, marketing and advertising, training, entertainment, and many others on the business front. For an individual, it might involve money spent on vacations, hobbies, dining out, and other forms of leisure or luxury. The power to control, reduce, or increase these expenses makes them a strategic tool in financial management.
Discretionary expenses are used as a lever to manage financial health and long-term growth. For a business, during a profitable period, an increase in discretionary expenses like investing more in marketing strategies or employee training can boost the company’s growth or market position. On the flip side, during an economic downturn or loss phase, companies can cut down on these expenses in an effort to maintain economic stability. Similarly, for individuals, discretionary expenses enable a better quality of life when personal finances are solid, while they can be curtailed in times of financial crunches. Therefore, they create a balance in financial decision-making by providing room for necessary adjustments based on economic circumstances.
Examples
1. Dining Out: While everyone needs to eat, dining out frequently at restaurants or getting take-out food is a discretionary expense. You might choose this for convenience or enjoyment, but it’s not necessary for survival like buying groceries is.
2. Vacation Travel: Going on a trip for leisure is another discretionary expense. While traveling might be required for business and can be considered a necessary expense, a vacation is something you choose to do for enjoyment.
3. Entertainment: This category includes expenses such as movie tickets, concert tickets, gym memberships, or streaming subscriptions. These are all costs that are not necessary for survival, but enhance our lifestyle in some way or another. You could live without them, but you choose to spend money on them for pleasure or leisure.
Frequently Asked Questions(FAQ)
What is a Discretionary Expense?
A discretionary expense is a type of spending that is non-essential and often adjustable. Examples can include vacations, dining out, leisure activities and entertainment. These expenses are often the first to be cut when a person needs to save money.
How does a Discretionary Expense differ from a Non-Discretionary Expense?
Non-Discretionary expenses are often those that are mandatory, necessary and consistent, like rent, utilities, insurance, and groceries. On the other hand, discretionary expenses are those that can be adjusted or even completely eliminated if necessary.
Why is it important to identify Discretionary Expenses in personal finance?
Identifying discretionary expenses can help individuals and families to understand their spending habits better and manage their finances more efficiently. It can also help in creating a realistic budget and saving goals.
Can businesses have Discretionary Expenses?
Yes, businesses can have discretionary expenses. For businesses, these might be expenses such as customer entertainment, staff parties, or investments in new technologies or training.
Should I always reduce my Discretionary Expenses if I want to save more money?
While cutting back on discretionary expenses can certainly help you save money more quickly, it’s also important to ensure you’re setting aside funds for enjoyment. The goal is to create a sustainable budget that allows for savings without depriving yourself or your family of recreational activities.
Can a Discretionary Expense become a Non-Discretionary Expense?
While typically discretionary expenses are defined as non-essential, certain expenditures can shift categories based on individual circumstances. For example, if someone’s job depends on having high-speed internet at their home, the related expense could be considered non-discretionary, whereas it may be viewed as discretionary for others.
How often should I review my Discretionary Expenses?
Ideally, you should review your discretionary expenses every time you budget, which can be on a monthly or weekly basis. This can help you identify areas of excessive spending and adjust accordingly.
Related Finance Terms
- Variable Costs: These are expenses that vary based on the volume of goods or services a business produces.
- Budget Planning: The process of creating a plan to spend your money, often considering both income and expenses, including discretionary ones.
- Non-essential Expenses: Expenses that are not necessary for living or operating a business. They’re often synonymous with discretionary expenses.
- Fixed Costs: Discretionary expenses are the opposite of fixed costs, that remain the same regardless of production or sales volumes.
- Saving Strategies: The plans and actions implemented to save money and reduce expenses, often by managing discretionary costs.
