Budgeting Discretionary, Variable, and Fixed Expenses

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Discretionary expenses are recurring or non-recurring costs for non-essential items or services. Although these can be somewhat subjective in nature, discretionary expenses are often viewed as "wants" rather than "needs."

A discretionary expense differs from a variable expense in that variable expenses are expenses required for comfortable living, such as groceries, car maintenance, and electric bills. You can live without discretionary expenses, such as movie tickets, books or your daily latte. Understanding the differences between different types of expenses is the key to good budgeting.

Examples of Variable and Discretionary Expenses

The cost of "basic" clothing is a variable expense because the cost depends on clothes you may need to replace due to wear and tear, clothes you need to purchase because you moved to a different climate or clothes you need to purchase due to a new job with wardrobe requirements. A leather coat is a discretionary expense, for example, because you could purchase a less expensive cloth coat.

Discretionary expenses for a small business might be public relations, charitable donations, training, and bonuses. Likewise, funds for a holiday party or a weekly flower delivery are discretionary. These expenses are also called "discretionary costs" in a business.

Consider Budget Ranges, Both Personally and Professionally

As you plan your budget, consider a range of spending, rather than a fixed dollar amount, for each discretionary expense. The ranges should take into account seasonal changes in spending or other outside influences. For example, while you may spend a reasonable amount purchasing new winter clothing for each family member at the end of the fall, you may not incur any other new clothing expenses until mid-spring, when temperatures begin to warm.

Small businesses experience the same kind of fluctuations. For example, your business's annual holiday party may be a big expense but it only happens once a year. The same is true for the annual business trip to attend an industry conference. 

Fixed Expenses

In addition to discretionary and variable expenses, you'll want to track or budget for fixed expenses which stay the same every month. These might include rent, a mortgage payment, a car payment or an insurance premium. Because these costs are consistent, they often constitute the backbone of a budget. 

Categorize Your Discretionary Expenses in Your Finance Software

Some personal finance software lets you set a different amount every month for discretionary and variable expenses. If your software doesn't have flexible budget categories, either set up a miscellaneous or other "fun money" category and set aside money for discretionary expenses each month. The only exception to this is if you're on a very tight budget, In that case, you should eliminate all discretionary expenses until you have more income.

Keeping track of every expense (no matter how small) is essential to good budgeting. So is a keen understanding of the differences between discretionary, variable, and fixed expenses, as well as their place in your budget. If you're mindful of all this, you'll have a much better picture of where your money is going.