Discretionary spending refers to the expenses businesses or individuals can survive without. These non-essential costs often align with personal or organizational wants rather than needs. For instance, meals at restaurants, vacations, or employee wellness programs fall under discretionary expenses. Unlike essential costs, cutting these expenses doesn’t disrupt day-to-day operations.

Key Features of Discretionary Spending

Discretionary spending has a few unique traits:

1. Non-Essential Costs

These expenses are optional. Marketing for a business or buying a new smartphone is a cost people or companies choose but don’t need for survival or daily operations.

2. Income Dependency

Discretionary spending relies on leftover income after covering essentials like rent, taxes, and groceries. When income drops, these costs are often the first to go.

3. Varies by Context

What one person or business considers essential may be discretionary for another. For example, a training program might be critical for one company but optional for another.

Examples of Discretionary Spending

For Businesses:

• Advertising and Marketing: Businesses often allocate funds to boost their visibility or reputation. You can cut these necessary costs during tough times.
• Employee Perks: Wellness programs, team-building activities, and training initiatives are common discretionary expenses.
• Growth Investments: Activities like mergers, acquisitions, or expansion projects fall into this category.

For Individuals:

• Vacations and travel.
• Dining at restaurants or ordering takeout.
• Hobbies like gym memberships or crafting supplies.

Discretionary vs. Non-Discretionary Spending

It’s helpful to know the difference:

• Discretionary Expenses are “wants.” Examples include luxury items, entertainment, or business marketing campaigns.
• Non-Discretionary Expenses: These are “needs.” Think rent, payroll, utilities, or groceries. These costs keep households and businesses running.

How Economic Changes Affect Discretionary Spending

Economic conditions directly impact discretionary spending. During periods of economic growth, people and businesses feel more confident about spending money on non-essentials. For example, a company might expand its marketing efforts, while individuals may take vacations.

Discretionary expenses are usually the first costs you cut during economic downturns. Households might stop dining out or cancel a gym membership, while businesses might scale back on advertising or halt growth plans.

Tips to Manage Discretionary Spending

1. Track and Separate Expenses

Keep a clear record of discretionary expenses apart from essential ones. Knowing where your money goes makes it easier to make cuts when needed.

2. Rank Expenses by Importance

Prioritize discretionary expenses. Decide what’s least important and cut those costs first. This might mean pausing employee training programs before reducing a business’s marketing.

3. Plan for Tough Times

Set aside funds during profitable periods to cover essentials during economic slowdowns. It ensures that cutting discretionary spending doesn’t harm operations.

Why Businesses Monitor Discretionary Spending

For businesses, discretionary expenses often link to growth and branding. Activities like marketing, employee perks, or corporate events help build a company’s reputation. However, when cash flow tightens, these expenses can be reduced or postponed without threatening daily operations.

Businesses that rely heavily on discretionary spending must be careful during downturns. For example, a company selling luxury goods might see a sharp drop in demand during a recession. Planning and controlling discretionary expenses can help them survive tough periods.

Discretionary Spending in Public Finance

In public finance, discretionary spending covers education, defense, and transportation. Governments allocate funds to these categories through an annual budget. Unlike mandatory programs like Social Security, you can adjust discretionary spending each year based on priorities.

For example, the U.S. government spent $1.2 trillion on discretionary spending in 2016. About half of this amount went to national defense; the rest funded education, health, and transportation.

How Businesses Optimize Discretionary Spending

Smart strategies can make discretionary spending more efficient:

• Cost-Benefit Analysis: Evaluate whether a discretionary expense adds value to the business.
• Scenario Planning: Quickly identify costs you can cut during economic hardship.
• Balanced Investments: Allocate funds strategically to support growth without risking financial stability.

Final Thoughts

Discretionary spending plays a key role in personal and business finances. Businesses use these non-essential costs to grow, and people use them to enjoy a better life. However, they require careful management, especially during uncertain times.

By tracking, prioritizing, and adjusting discretionary costs as needed, businesses and households can maintain financial health while planning for the future. Staying prepared for economic shifts ensures you’re ready to cut back when necessary while still focusing on long-term goals.