Discretionary spending encompasses those “fun” purchases you can do without, but often make life more enjoyable. Think: going out to eat, grabbing a latte, shopping, traveling, and concerts. And compared to your non-discretionary spending — expenses such as your rent, car payment, and utility bills — discretionary spending is more flexible.

That means when your budget is tight, discretionary expenses are usually the first to be cut. But when you’re in a good place financially, you can spend more freely without the guilt or hardship. Let’s take a closer look at discretionary expenses and how they fit into your financial life.

Discretionary spending definition

Discretionary spending includes purchases beyond your essential expenses that you need to pay for every month, because if you don’t, there will be personal or financial consequences. Examples of non-discretionary expenses include housing, utilities, internet and cell phone bills, insurance, transportation costs, healthcare, groceries, minimum debt payments, and childcare.

In other words, discretionary purchases are those fun purchases that aren’t necessary for living, but add value to your life in other ways.

For example, groceries are an essential expense. After all, you need to eat. But paying for a nice meal out would qualify as discretionary spending. Because while you need to eat, you don’t need to eat a marked-up meal at a fancy restaurant. However, a nice meal out may bring you joy, spurring you to splurge every once in a while.

Discretionary spending can be a relatively flexible part of your budget. Even during an emergency, you have to find a way to pay for essentials. But you can more easily cut back on discretionary spending if you need to tighten up your finances.

Discretionary spending vs. discretionary income

Discretionary income refers to the amount of post-tax income you have left after paying for essential expenses. You use your discretionary income to fund your discretionary spending.

If your income shrinks for whatever reason, your discretionary income typically takes the hit. The portion of your income that covers essential expenses can only shrink so much since you always need food, shelter, and clothing. But your discretionary income can expand and contract based on external circumstances.

For example, your discretionary income might expand when you get a raise. Assuming your essential expenses don’t change, you’ll have more money for discretionary spending.

But certain life changes can cause discretionary income to contract, even without a pay cut. For example, if you have a child, your essential expenses may grow, leaving less income for discretionary spending.

Examples of discretionary expenses

Discretionary expenses range from major expenses to tiny purchases, and they include tangible and intangible goods as well as experiences. Below are some examples of common discretionary expenses you may include in your budget:

• Dining out: Restaurants, take-out, delivery
• Entertainment: Concerts, sporting events, movies, museums, theater
• Grooming and beauty: Haircuts, beauty products, salon visits
• Household goods: Decor, furniture, electronics, kitchenware
• Travel: Lodging, plane tickets, meals, excursions
• Gifts: Birthday, holiday, anniversary
• Donations: Recurring and one-time charitable donations
• Subscriptions and memberships: Streaming services, gym memberships, meal kit subscriptions

How to budget for discretionary spending

While discretionary spending isn’t necessary, it pays for the things and experiences that add value to your life. That’s why it’s important to account for discretionary and non-discretionary spending, along with savings goals, when creating a budget.

There are several ways to budget for discretionary spending, so you can pick a method that works for you.

Below are a few common methods of budgeting for discretionary spending:

50/30/20 budgeting

The 50/30/20 rule has you allocate your net income into three major categories: essential spending, discretionary spending, and savings. Here’s how it works:

• 50% of your income goes toward essential spending
• 20% goes toward savings goals and extra debt payments
• 30% is dedicated to discretionary spending

While meant as a rule of thumb to help you balance discretionary and non-discretionary spending, these percentages aren’t set in stone. You can always tweak them if your circumstances require it. For example, if you have several young children requiring childcare, you may need to allocate more than 50% of your income toward essential expenses. If that’s the case, you’ll need to cut back on savings goals, discretionary spending, or both.

Zero-based budgeting

Zero-based budgeting is a hands-on strategy that’s best for those who want to keep a close eye on their finances. With this method, every dollar you earn has a purpose, whether that’s saving or spending.

To create a zero-based budget, categorize your monthly expenses and figure out how much you spend within each category. Consider discretionary expenses, non-discretionary expenses, and savings goals when creating your categories. There’s no suggested number of categories for your budget, but you should have enough to keep you organized without overwhelming you.

Next, figure out how much you want to spend on each category every month, assigning a target dollar amount. Make sure your total “spending” — including all your spending and savings targets — equals your total income. Throughout the month, track each dollar spent against your budget, reallocating dollars from one category to cover another if you ever overspend.

Pay-yourself-first budgeting

Where zero-based budgeting is ultra hands-on, pay-yourself-first budgeting is the opposite. This method is ideal for those who have a good handle on their spending and aren’t struggling to make ends meet each month.

With pay-yourself-first budgeting, the only number you need to worry about is how much you save, or pay yourself, each month. This includes money for retirement, investments, and other savings goals. Once you’ve paid yourself, the rest of your money can go toward essential expenses and discretionary spending.

This method may sacrifice discretionary spending at the expense of saving. Depending on your priorities, this could be advantageous. But if you’re saving an unrealistic amount of your income with barely enough left to cover essential expenses, you may not have much, if any, remaining for discretionary spending.

Balancing discretionary spending

Regardless of the budgeting method you choose, don’t neglect to add discretionary spending to your plan. If you’re tight on cash, discretionary spending may feel frivolous, and too much of it can be. But spending a little on things and experiences you love — while paying your bills and putting money toward savings — can help you stay motivated while working toward your financial goals.