What is a Discretionary Expense?

The term discretionary expense refers to a non-essential expense incurred by individuals, households, or businesses and can also be viewed as more of a desire than a necessity.

One common example is when someone buys a new smartphone when the latest edition is released. This is a purchase that helps the individual feel good, but is not directly related to their survival.

Understanding Discretionary Expenses

Expenses can be divided into non-discretionary and discretionary expenses. Non-discretionary expenses are mandatory costs, such as housing, taxes, debt, and groceries; discretionary expenses are any costs incurred over and above what is considered necessary.

We typically refer to discretionary expenses as wants, while non-discretionary expenses as needs.

Discretionary expenses may be incurred under the following situations:

Families and individuals

A market-based economy consists of many households, and individuals contribute to the growth of the economy through increased consumption and production.

Although some expenditures in modern society are necessary expenses – food, water, clothing, shelter – most expenditures are discretionary.

Businesses

Costs can vary, for instance, an internet connection is essential for a cloud storage company, but can be ignored by a retail store. In some companies, training costs are essential, but discretionary in others. The first expenses to be cut by a business during a recession will be discretionary ones.

On a Final Note

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