Discretionary Expense

A discretionary expense is a cost that a business or household can survive without, if necessary. Discretionary expenses are often defined as nonessential spending. This means a business or household is still able to maintain itself even if all discretionary consumer spending stops.

Expenses are divided into several categories, namely non-discretionary and discretionary. While non-discretionary expenses are considered mandatory—housing, taxes, debt, and groceries—discretionary expenses are any costs incurred above and beyond what is deemed necessary. These are generally considered wants, while non-discretionary expenses are usually referred to as needs. As such, discretionary expenses rarely have anything to do with a business or household's day-to-day operations and, instead, have to do with lifestyle and choice.

Businesses and individuals pay for discretionary expenses with discretionary income—the amount of money left over after paying for housing, food, taxes, and other necessities. When times are good, people have more money to spend, and they normally do so on things they don't need, such as luxury items and other services—cars, vacations, restaurants, entertainment, electronics, etc.

When times get tougher and short-term cash flow issues emerge, managers and individuals will first look to weed out any unnecessary costs. Discretionary expenses are normally the first to go because stopping them is unlikely to have a major impact on a business or household.

In a corporate environment, discretionary expenses are usually costs linked with promoting or boosting a company’s standing in the market. Buying the raw materials used to produce goods is usually considered essential. Spending money on employee training programs is not usually considered essential. 

Individuals may also encounter moments when it is necessary to consider which of their expenses they can live without. For example, a person who runs into financial difficulties is more likely to prioritize paying utility bills over financing a vacation.

As mentioned above, discretionary expenses are any costs that a consumer or business wants rather than needs. Some common discretionary items include: Vacations and travel expenses, automobiles, alcohol and tobacco, restaurants and other entertainment-related expenses, coffee and specialty beverages and hobby and sports-related expenses, such as crafting, sewing, and gym memberships.

It's important to point out again that what defines a discretionary expense depends on who's doing the buying. For instance, buying a new car may be considered a want for one person, but it may be considered essential for someone who has a long commute to work where driving is the only option.

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