Mastering Discretionary Spending: A Comprehensive Guide

Budgeting is a crucial step in developing a robust financial plan. While it’s essential to prioritize saving for the future and paying off debt, it’s equally important to allocate some funds for an enjoyable lifestyle. Whether you’re creating a budget for the first time or evaluating your existing approach, understanding discretionary spending is key to financial success. At O1ne Mortgage, we believe in empowering our clients with the knowledge to make informed financial decisions. For any mortgage service needs, feel free to call us at 213-732-3074.

What Is Discretionary Spending?

Discretionary spending encompasses all nonessential expenses. These costs are not necessary for your and your family’s basic needs. Essential expenses such as rent, utilities, groceries, and debt payments are not considered discretionary spending.

Examples of Discretionary Expenses

Common types of discretionary spending include:

• Streaming service subscriptions
• Dining out, takeout, and food delivery
• Gym memberships
• Concert and event tickets
• Vacations
• Coffee shop purchases
• Hobby-related costs
• Books
• Electronics
• Jewelry
• Charitable contributions

Some essential expenses can also become discretionary if you spend more than what’s required for your basic needs. For example, groceries, clothing, and transportation are basic needs, but spending extra on snacks, fine dining, expensive clothing brands, or vehicle upgrades can be considered discretionary expenses.

How Much Should You Budget for Discretionary Spending?

The amount you should budget for discretionary spending depends on your income, expenses, and financial goals. If your income is low or you have significant debt payments, it might make sense to cut back on discretionary spending to increase your ability to save or pay down debt. Conversely, if you have a higher income, you may afford to spend more on your lifestyle.

Consider the 50/30/20 Approach

If you’re unsure where to start, consider using the 50/30/20 budget approach as a guide:

• Spend 50% of your monthly income on necessities.
• Spend 30% of your monthly income on discretionary expenses.
• Allocate 20% of your income toward debt payments and savings or investment goals.

You don’t have to stick to these exact proportions, but the 50/30/20 approach provides a customizable framework based on your situation. If you have a lot of debt or ambitious savings goals, you may want to increase the percentage allocated to savings and reduce discretionary spending. If your basic expenses don’t take up half your monthly income, you may have more freedom with the other two categories.

How to Reduce Discretionary Spending

If you find that you’re spending too much on nonessential expenses, cutting back can help you meet your basic needs, save more, and pay down high-interest debt. Here are some steps to achieve your goal:

Track Your Spending

If you don’t already track your spending, review your expenses for the past three months and categorize each one. This will give you an idea of where your money is going and help you pinpoint the best ways to reduce nonessential spending.

Cut Back on Subscriptions You Don’t Use

You may subscribe to several streaming services, but it’s possible that you’re not using all of them often enough to justify the cost. Identify monthly subscriptions you aren’t using regularly and cancel them. Consider keeping one streaming subscription active at a time and switching between services every month or two based on what you’re watching.

Cut Other Recurring Costs

If you have a gym membership you don’t use, a subscription to a food delivery app, or another recurring cost you can reasonably cut, consider whether you can benefit from the savings.

Prepare for Impulse Spending

While occasional unplanned purchases are fine, doing it too often can wreck your budget. When you head to the grocery store, make it a goal to stick to your shopping list. If you find something online that you want, add it to a wish list and come back to it in a few days to decide if you still want it—and save up for it if necessary.

Look for Cheaper Ways to Maintain Your Lifestyle

Examine the aspects of your lifestyle you don’t want to downgrade and see if you can maintain them while cutting costs. If you don’t want to cancel streaming subscriptions, consider asking a friend or family member to split one with you. Rather than buying new books, get a membership to your local library.

Also, don’t be afraid to look for waste in your essential expenses. Shop around for auto insurance at least once a year to ensure you’re getting the best rates, and consider changing the temperature in your home by a couple of degrees to save on utilities.

Build and Maintain Good Credit to Minimize Costs

Your credit score may indirectly affect your discretionary spending, especially if your debt payments are high due to higher interest rates. Review your credit score and credit report to evaluate your credit health and look for opportunities to improve your credit score over time. With good credit, you may be able to refinance or consolidate debt into a lower interest rate, freeing up more cash flow for other financial goals and discretionary spending.

At O1ne Mortgage, we are committed to helping you achieve your financial goals. For any mortgage service needs, call us at 213-732-3074. Our team of experts is here to guide you every step of the way.