Calculating your discretionary spending
Discretionary spending is the money you spend on optional, non-essential items, such as vacations and hobbies. In contrast, variable and fixed budgets include required spending, like rent and medical costs. Discretionary spending includes the luxury and fun extras you spend money on. It can add up fast!
I used a relaxing picture with palm trees and lounge chairs to illustrate this topic on purpose. ☺ In other posts, I discuss how emotions can influence the way we spend and relate to money. Emotional purchases are usually made on non-essential items, like jewelry or clothes. This behavior impacts discretionary spending the most. So, calculating your discretionary spending can be an eye opening experience.
These are the categories I suggest using to calculate your discretionary spending total.
- Cable or Premium Streaming Packages (sports, movie channels)
- Grooming (manicures, pedicures, massages, waxing)
- Restaurants (all meals out, coffee, fast food, gas station snacks)
- Vacations
- Entertaining & Parties (birthday, graduation, New Year’s party)
- Sports, Recreation & Hobbies (craft supplies, athletic equipment, league fees, lessons)
- Media (books, magazines, online subscriptions)
- Entertainment (movies, concerts, games, performances, leisure activities)
- Gifts & Holiday Spending
- Home Decor (front door wreath, holiday decorations, art, furniture)
- Electronics (laptop, cell phone, earbuds etc)
- Travel (holiday, wedding, family gatherings)
- Charitable Donations (money given to nonprofit organizations)
- Home Improvement (renovation project, landscaping)
- Miscellaneous
To the right is my discretionary spending budget for 2020. Previously, we used last year’s bills to estimate your variable spending budget. I suggest using the same process to determine how much you spent on discretionary items last year. If you don’t keep paper or digital receipts, you can find this information by logging into your bank account. Use the budgeting and spending tools to search through your transaction history. Here’s another discretionary expense tracking tool you might like.
| CATEGORY | ANNUAL COST |
|---|---|
| Restaurants | $450 |
| Entertainment | $900 |
| Gifts & Holiday Spending | $350 |
| Home Decor | $150 |
| Travel | $150 |
| Charitable Donations | $200 |
| Miscellaneous | $250 |
| TOTAL | $2,450/year |
| $205/month |
Once you calculate last year’s discretionary spending, add each of the three budget categories together: fixed, variable and discretionary. The sum represents what you’ll likely spend each month if your habits remain the same. My total monthly budget (below) is about $125 higher than what I typically spend per month. Since some figures are estimates, this makes sense.
| CATEGORY | MONTHLY COST |
|---|---|
| Fixed Expenses | $1,420 |
| Variable Expenses | $744 |
| Discretionary Spending | $205 |
| TOTAL MONTHLY BUDGET | $2,369/month |
Spending more than you earn is a Slippery slope.
If your heart is racing, take a few deep breaths. It can be overwhelming to see the annual total you spend on non-essential items. Do you spend more money than you earn? This is a harmful habit that leads to mounting debt and no way to pay it off. If you are shocked by your discretionary total, that’s ok! Knowledge is power. Recognizing the need to change your spending habits is half of the battle. Take time to digest what you uncovered during this exercise.
It’s not too late to make changes this year!
There’s a silver lining. The discretionary total you calculated represents LAST YEAR’S spending total. Everything in this category is optional. So, you have the ability to wipe the slate clean, make changes and cut non-essential costs this year. Think about what you could do with the money you save! Not sure how to reduce your spending? Let’s look at your budget together!