Discretionary spending

What It Means

Discretionary spending has two meanings. (1) In a household budgetBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more, it's money spent on things you want rather than need, such as eating out, entertainment, shopping, travel and subscriptions. Experian and Chase both describe it that way, and the amount often changes from month to month. (2) In the federal budget, it's the part of spending Congress sets each year through appropriation acts, according to the Congressional Budget Office (CBO), as opposed to mandatory spending, which follows from program rules such as who qualifies and how benefitsBenefits packageEverything an employer offers on top of wages, such as health insurance, paid leave and a retirement plan, which can be worth thousands of dollars a year. See more are figured.

How It Sounds at Home

• "That's coming out of the fun money."
• "We cut back on eating out to save for the trip."
• "Is that a need or just a want?"

The Breakdown

Worked example. A household takes home $4,000 a month and spends $2,300 on needs (made-up numbers). Its discretionary spending looks like this:

That's 20% of take-home payTake-home payThe money that actually reaches you from a paycheck after taxes and other deductions are taken out, also called net pay or net income. See more, and $900 is left for savings and extra debt payments.

What the result means. Discretionary spending is the part of a budget you can change fastest, because no lease or loan holds it in place. If needs rise, say rent goes up by $200, this is where the room usually comes from. Cutting eating out from $250 to $150 and shopping from $240 to $140 would free that $200 without touching savings.

Good to Know

The Consumer Financial Protection Bureau's lessons on needs and wantsNeeds vs wantsThe split between costs you must pay to live, work and protect what you have (needs) and extras that would be nice to have (wants). See more call covering every need before spending on wants a wise habit, which is why the calculator asks for needs first. There's no official figure for how much discretionary spending is too much; the 30% in the 50/30/20 rule50/30/20 ruleA budgeting guideline that splits after-tax income into 50% for needs, 30% for wants and 20% for savings and paying down debt. See more is a common guideline, and a household with high rent may need a smaller share. In news about the federal budget, the phrase means something else: the Congressional Budget Office uses it for the spending Congress decides through yearly appropriation acts.

Related Terms and Categories

• Needs vs wants

  The split between costs you must pay to live, work and protect what you have (needs) and extras that would be nice to have (wants).

• 50/30/20 rule

  A budgeting guideline that splits after-tax income into 50% for needs, 30% for wants and 20% for savings and paying down debt.

• Impulse spending

  Buying something on the spur of the moment, without planning for it or checking it against your budget.

• Variable expenses

  Regular costs whose amount changes from month to month, such as groceries, gas, utilities and eating out.

• Fixed expenses

  Costs that stay about the same every month, such as rent, a car payment or an insurance premium, usually due on a set date.

Household money and budgeting