On average, Americans may spend about $18,000 a year on non-essential items, also known as discretionary spending, according to one 2019 study.
While it’s important to spend on things that give you pleasure—whether it’s a cable subscription or take out once in a while—this kind of spending can get out of hand quickly if you’re not careful, and it can interfere with your larger savings goals. That’s why it’s critical to build discretionary spending into your monthly budget. Having a budget for discretionary spending helps to ensure you can cover your bills and still have some fun.
What is discretionary spending?
One way to identify discretionary spending is to consider the difference between needs and wants. Things you need contribute to essential spending and include food, shelter, medicine, utilities and insurance. What you buy outside of this category can usually be categorized as a “want,” or a discretionary expense. Discretionary spending is less about the purchases that are needed to keep your household running and more about lifestyle. Some examples include:
● Going out to eat
● Gym memberships
● Concert tickets
● Books, magazines, movies and other forms of media
● Luxury clothing
● Spa visits, hair salons, nail appointments
● Birthday gifts and holiday spending
● Meal subscription services
Discretionary spending isn’t a bad thing. But if you don’t stay vigilant, non-essential purchases can wreak havoc on your budget, leaving you without enough money to cover your essentials.
Building a budget that includes discretionary spending
A budget is a detailed plan for how to spend your money. Start by taking a look at your income, the money you have coming in from your job, side gigs, and any passive income from things like dividend stocks or rental property. The money you have coming in each month represents the upper limit of what you can reasonably spend.
Next, gather detailed information about your monthly spending. Look at bank and credit card statements and determine how much you typically spend on essential and non-essential expenses. Total your essential costs and subtract this sum from your income. What’s left is available for discretionary spending. If your necessary spending changes in the future—say your insurance premiums go up—you may need to find ways to trim your discretionary expenses.
Your discretionary income also represents the pool of money you have to use toward savings for financial goals, such as a down payment on a house, a college fund for your kids, or your own retirement. Keeping track of discretionary spending not only helps to ensure you can cover your bills but can help you reach your other financial goals, too.
There are a variety of ways you can structure a budget and monitor your discretionary spending.
One popular method is the 50-30-20 budget, popularized by Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan. With this method, 50% of your income goes to necessary expenses, 30% goes to discretionary spending, and 20% goes to savings.
Another approach is known as the zero-sum budget. This type of budget allocates every dollar of your income to necessary and discretionary expenses, debt payments, and savings.
You may also consider a values-based budget in which you prioritize the types of discretionary spending. After accounting for your necessary expenses, prioritize the spending that is most important to you and stop or decrease the types of discretionary spending that don’t add value to your life. For example, going to the gym may be the best way you manage stress, so you might want to make sure to include that expense in your budget.
Regardless of what kind of budget you choose, the most important part of budgeting is adhering to it. Don’t be afraid to try multiple strategies until you find the one that works for you.
Tips for sticking to your budget
Tracking your discretionary spending every month is a necessary habit that can feel difficult at times. There are a few strategies that can help you stick to your budget for non-essential items.
When you are tempted to buy something you don’t need, initiate a 24-hour waiting period to help you avoid impulse buying. If you are still interested in buying the item one day later, it may be worth making room in your budget for it. If not, it’s likely a purchase you can live without.
Reward yourself for achieving financial goals, such as building an emergency fund. Reaching a savings goal takes discipline and careful monitoring of discretionary spending. Once you get there, reward yourself with something you want, such as a dinner from a favorite restaurant. Doing so can help keep you motivated and stick to your budget when short-term gratification is tempting.