- Are you not feared of a job loss ?
- If no, do you have an emergency fund ?
- If yes, can you sustain for more than 1 year with your current life style without an income ?
Check out this short video before we deep dive in to the article.
What is a Discretionary Expense ?
A discretionary expense is an expense where a person can make a decision to not spend and still live without it.
A simple example is: Body spray.
Our parents were able to live without it. We have witnessed COVID-19 and were able to live without it 😀. But, we would still step out and purchase it.
Is it really a discretionary expense? YES. Let’s see why.
Why do you need to worry about that ?
Discretionary expenses if not controlled (or) avoided it would really take out a considerable share in your family budget. Researchers and companies wanted a recurring consumption model from all human beings and had introduced few items. This has been treated/advertised/preached as essential ones. It took a generation to change the habit and acquire market share. Now, will they allow someone to confirm those items as discretionary items ? Never.
In that case, it is our responsibility to find out and understand where are we spending and why are we spending. Let’s take the previous example of a body spray.
A normal body spray costs in the range of 150 to 200/-. If a person consumes it on a daily basis, then the next purchase can be likely made within two months. An average of 6 per year. Which is close to 1200/- If you have to use this for your life time then multiply it.
Worst thing is, when a person spends on such discretionary item regularly, and does not have provisioned an emergency fund and relies on friends, family and people worried about status quo calls bank for personal loan.
If you are not aware of Emergency Fund – Read Here
Essential Expense vs Discretionary Expense
Discretionary Expenses vary from one person to another. It can be debatable since for a Person A, car might be a necessary one and spending on car and accessories will become a necessary expense. However, for a person B, car may not be a necessary one even though the person is capable to buy and have money.
Let us take an other case, is spending on confectionary items an essential one or non-essential one. Health conscious people say it may be un-necessary though they have a craving for it. While others they really don’t know and go by their intuitions.
Here comes the understanding of “needs” vs “wants”. If you can clearly differentiate whether an expense that you are making is tagged to your “needs” vs tagged to your “wants”, then you can identify whether it is necessary (or) not necessary.
Once you start spending on your discretionary, sad thing is the expenses grows like a tree. The branches appear. Let’s consider a simple example:
A man steps out for a hair cut every month and once the salon becomes very familiar to him, they start introducing some value added products. To name a few: facial, oil massage. Now you are tempted to try once as the service is very good. Finally, he fall’s for that trap and it becomes a routine.
What are the ways to identify discretionary expenses
First thing is to start capturing all your expenses. Once you have the habit of capturing all your expenses, it becomes easier for you to tag as :
- “Needs” vs “Wants”
- “Necessary” vs “Un-Necessary”
- “Essential expenses” vs “Discretionary expenses”
Can an excel sheet help you out ?
Can a mobile app help you out ?
Or the traditional way of writing it in a diary will help you out ?
Choose whichever way works for you. There are very good mobile apps available online to help you do this if you are a mobile savvy. If not, an excel sheet (Google sheet) will be an easier way to do it.
Here is a sample table from an external link which talks about budgeting and displaying it in a tabular format.
Once you have tagged it, the most important thing to identify is “What are the habits forcing you to spend on those”.
One of my recommendation is to identify the habit that is relevant to your discretionary expense. It’s nicely explained in the book called “The Power of Habit: Why We Do What We Do, and How to Change”.
 
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Charles Duhigg has clearly explained in his book about how Habits are formed. For detailed explanations click here. |
How to measure those ?
Let’s take few specifics that we discussed in this article to see how you can measure those.
Assumptions are:
- Consumed by 1 person
- No change in the price for next 20 years (This is unlikely to happen)
| Expense Name | Monthly | Yearly | 20 Years | Avg Consumption |
|---|---|---|---|---|
| Body Spray | 150 | 900 | 18000/- | 6 times in an year |
| Streaming Subscription | 1000 | 12000 | 240000/- | |
| Ice cream | 200 | 1200 | 24000/- | 6 times in an year |
| Coffee | 300 | 3600 | 72000/- | 12 times in an year |
| …. | …. | …. | …. | ….. |
How to control those ?
Change might not be fast and it isn’t always easy. But with time and effort, almost any habit can be reshaped.
Charles Duhigg in his book has mentioned about how MIT researchers discovered a simple neurological loop at the core of every habit, a loop that consists of three parts: A routine, a reward and a cue. To understand your own habits, you need to identify the components of your own loop.
Identify routine and the reward you get while spending for your discretionary expense(s). See if you can cut down that habit which ultimately cuts down your spending on discretionary expenses.
Finally…
I am not discouraging to stop spending on the most “wanted” items, but asking readers to understand the difference clearly and spend only on priorities. COVID-19 has taught us so many things and let this be one of them too.
This is a lengthy article and I have covered most elementary items from a common man perspective. In the upcoming articles, let’s explore more options on other related topics.