What is discretionary spending? | The complete guide for parents

You might find yourself spending on things that aren't absolutely necessary but that add a little joy to your life. Maybe a trip to the salon to get highlights, tickets to see your favorite football team in the playoffs, or the monthly gym membership you signed up for to kickstart your New Year's resolution. These are examples of discretionary spending. While there's nothing wrong with buying things that make you happy, keeping your discretionary spending within your budget is essential. 

The essence of discretionary spending

The definition of discretionary spending is buying items or services you want but can survive without. Deciding not to purchase the item won't adversely impact your health, income security, or livelihood. You'll go on just as before, just sans what you wanted. Common discretionary spending examples include:

• Dining out in restaurants or ordering takeout

• Streaming and cable TV services

• Gym memberships

• Other monthly memberships, such as meal kits 

• Travel expenses and vacations

• Gifts and holiday expenses

• Entertainment, such as movie or game tickets

• Hair cuts, skin care, and salon visits

• Electronics upgrades, like a new smartphone or laptop

• Luxury items

Buying discretionary items can improve your quality of life or jazz up your weekly routine, but it's important not to overdo it. Your essential needs should always come first.

Discretionary vs. non-discretionary expenses

Unlike discretionary expenses, non-discretionary costs are mandatory. If you don't pay for them, it can harm your ability to provide basic needs for your family or harm your credit. Some examples of non-discretionary expenses are the following: 

• Housing costs, like a mortgage or monthly rent

• Payments for outstanding balances on credit cards and loans

• Food expenses and groceries

• Health, auto, and property insurance

• Doctor's visits and prescribed medication

• Utilities

• Social Security and income taxes

• Gas

How to set discretionary spending limits and goals

To avoid spending more than you'd like on discretionary items, it's best to establish a budget. When you know exactly how much money you have coming in and the cost of your non-discretionary expenses, you'll learn how much you have left over for discretionary items.

1. Track your spending

To start, examine your prior spending history. If you make most purchases with debit cards, credit cards, or checks, you can use your monthly statements to see where your money goes. If you prefer using cash for spending, you'll need to tally up your receipts to know how you spent your money. 

Using several months of spending history is a good idea, rather than just the prior month's. You'll likely find that you have some expenses that occur irregularly. For example, a trip to the hair salon might happen every three to four months, or a streaming service may charge an annual subscription. Reviewing older bank statements ensures you don't overlook any costs to include in your budget.

2. Categorize your spending

Once you have a list of all your monthly expenses, determine whether they fit into the discretionary or non-discretionary spending category. List each item, along with the cost you pay. Remember that some of your expenses, like your car payment, may be fixed expenses while others vary from month to month. For variable expenses, calculate an average. For instance, if your monthly grocery bill typically ranges from $500 to $600, you could enter $550 for groceries. 

3. Set realistic goals

Now that you know how you're spending your money and where it falls in the mandatory vs. discretionary spending categories, you can start setting some goals. Determine whether your current spending habits align with your objectives or not. If you're struggling to make rent payments or get groceries, that's a sign you may be overspending on discretionary items or need to find ways to reduce mandatory costs. You'll also want to consider whether you meet your savings goals for emergency funds and retirement. 

Among the most popular budgeting methods is the 50/30/20 rule, which allocates 50% of income toward mandatory items, 30% for your discretionary budget, and 20% for savings. It's an easy way to establish a budget that meets your family's basic needs while providing a buffer. You can try it or adjust the allocations to suit your financial picture. Remember that the best budget is usually the one you'll stick with for the long term.

4. Calculate your limits

Using your goals, determine how much money you have each month for discretionary and mandatory items. If you decide that $100 is your limit for dining out, track your restaurant meals and takeout orders to make sure you stay within your budget. 

You'll likely find that your limits change over time. Getting a new job, having a baby, or other life milestones can all impact your budget. Reassess it regularly and make adjustments if needed.

5. Use tools and strategies to assist you

Today's technology makes it much easier to track your spending. You're no longer stuck with a calculator, notebook, and pencil to manage the family finances — instead, you can lean on automated tools to do the heavy lifting for you. Look for a money app (like Greenlight) that categorizes your spending activities and sends real-time alerts every time you use your card. With Greenlight, you can quickly review your historical banking activity and download it for budgeting purposes.

Gain more control over your finances with Greenlight

Greenlight's banking* services provide all the assistance you and your family need in your financial journey. With Greenlight's debit card, you can earn 1% cash back or up to 5% on savings.** Plus, the entire family can access fun tools designed to improve financial literacy and strengthen saving habits. Join Greenlight today and learn how to earn, save, and invest together.

*Greenlight is a financial technology company, not a bank. The Greenlight app facilitates banking services through Community Federal Savings Bank (CFSB), Member FDIC.

**Greenlight + Invest families can earn monthly rewards of 1% per annum, Greenlight Core and Greenlight Select families can earn 2% per annum, Greenlight Max families can earn 3% per annum, and Greenlight Infinity families can earn 5% per annum on an average daily savings balance of up to $5,000 per family. Only Greenlight Max and Infinity families can earn 1% cash back on spending monthly. To qualify, the Primary Account must be in Good Standing and have a verified ACH funding account. See Greenlight Terms of Service for details. Subject to change at any time.