What are Discretionary and Non-Discretionary Spending?
Updated on Jun 05 2020
Discretionary and non-discretionary spending are terms used to describe the categories of expenses you use daily in life. Some expenses are necessary, such as your rent, mortgage and utilities; others are more luxury or ‘frivolous’ purchases, such as your daily coffee or the cost of your golfing or traveling. A simpler way of thinking of the difference between discretionary and non-discretionary expenses is differentiating the categories as “wants” compared to “needs.”
As you approach retirement, it’s important to have a good idea of your daily, monthly and yearly spending so that you can have a good idea of your overall budget and expenses to help project what you will spend in retirement—and save and invest accordingly.
These are the costs that are contingent upon your lifestyle, or your “wants.” If you have hobbies you consider to be integral parts of your life, they are part of your discretionary spend:
Varied forms of entertainment that incur some costs, even if they are small, including:
- Crafts / Sewing
Whether visiting family a couple hours away, taking elaborate trips overseas or traveling on emergencies, such as bereavement; travel costs add up and will need to be budgeted
Unique to each individual, luxuries need to be factored into your overall long-term budget, including:
Children and Grandchildren –
If your children and grandchildren are a main focus in your retirement, you’ll need to think about how much cash flow you’ll need for family travel and planned and impromptu purchases. This is often an expensive category for many that also overlaps with the other categories.
Non-Discretionary or Mandatory Spending
This is the mandatory spend you don’t have a lot of control over and that you need to be a member of society, such as everyday bills, utilities and cost of living. These expenses are your “needs” and have to be factored into your retirement planning and spend projection:
Day-to-day living expenses, including:
- Utility bills
Any loans or credit you’ve taken out that you’ll need to continue to pay down the principal balance with periodic interest payments, including:
- Credit card
- Car loans
Taxes fluctuate as you age as they shift from salaried income to capital-gains rates. It’s important to have money set aside for annual taxes.
Insurance and Health Care
Health care costs tend to rise faster than inflation and can be a big expense as you age. You’ll need to account for the following:
- Insurance payments
- Emergency health care visits
Why Discretionary and Non-Discretionary Expenses Matter
When planning for your financial future you need to have a clear understanding of all of your living expenses. Many Americans can’t retire because they have not set aside enough for retirement. In fact, according to the National Bureau of Economic Research, almost half of Americans suffer from financial vulnerability during retirement and die nearly broke. Awareness of your discretionary and non-discretionary costs can help you plan for a successful financial future.
The payment trade publication The Nilson Report states that outstanding credit card debt in the America topped $1 trillion at year-end in 2016, and many in debt are seniors. It’s no secret that USA spending is out of control with the consumerist culture; which is why it’s especially important for seniors approaching retirement to plan for fiscal awareness and set realistic goals.
Track Your Discretionary and Non-Discretionary Expenses
In tough economic times, it may be necessary for to cut expenditures in response to decreases in income. Tracking discretionary expenses separately from essential expenses makes it 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 least to most. If a job loss or income reduction forces household budget cuts, your family can easily identify the first discretionary expense to eliminate.
Make a list of your discretionary and non-discretionary expenses to get on the right track for a successful financial future and retirement. Contact a financial advisor to help you get started.
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