These discretionary expenses are the most obvious ones to curtail if you're trying to cut back on expenses. Now you can organize your expenses by how they fit into both sets of categories. The following are fixed, nondiscretionary expenses:. Basically, there are two ways to use this information to save money: You can control your discretionary expenses skip the vacation this year , or limit your nondiscretionary expenses find a roommate or move into a smaller apartment. When it comes to figuring out where you need to cut expenses, you'll find spending ratios to be useful tools.
A spending ratio is simply the percentage of money, as it relates to your gross income, that you use for a particular area, such as housing or entertainment. If one area of expense becomes too great, you'll see that ratio is too high and begin to cut back. To figure out your housing payment ratio, which is one kind of spending ratio, add up all your housing costs rent or mortgage, insurance, property taxes, and so on.
Compare that number to your total income. If your housing costs are more than 28 percent of your gross income, you're paying too much for housing and should look for ways to cut your costs. Spending ratios are used to determine the amount of your gross income that goes toward a particular expenditure area.
They can be used as tools in cutting expenses. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. 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.
Meals at restaurants and entertainment costs are examples of discretionary expenses. 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.
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.
Let us help. Find an Advisor Near You. Enter Zip Code. Most Reputable Financial Advisors for Seniors. Read More. How to Find the Best Financial Advisor. Is Your Financial Advisor a Fiduciary? See all articles. What are Discretionary and Non-Discretionary Spending? Follow Us. A discretionary account, on the other hand, allows brokers to initiate and close trades without client permission.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute , as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website , view his author profile on Amazon , his interview on CBS , or check out his speaker profile on the CFA Institute website. Home » Terms » Non-Discretionary. What Is Non-Discretionary?
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