Do you ever wish your budget wasn’t so strict? That you had a little bit of cash to go towards whatever strikes your fancy at the time? Good news: discretionary spending is a great way to be more flexible with your money but still avoid busting the budget.
WHAT IS DISCRETIONARY SPENDING?
‘Discretionary spending’ in this context means money that you can spend at your own discretion. It’s your ‘fun money’ that you don’t budget for anything in particular.
Suddenly got a craving for something? Use your discretionary. Want to spontaneously go to the cinema? Use your discretionary. Found something you want, rather than need? Use your discretionary.
It removes the guilt from guilty pleasures and even families on a single income should aim to have some in their budget.
WHY IS DISCRETIONARY SPENDING IMPORTANT IN A BUDGET?
Does your budget have an ‘emergency fund’? A certain portion set aside for when ‘life happens’ and you’ve suddenly got an unexpected expense you haven’t budgeted for?
Every sensible budget has this emergency fund. Discretionary spending is similar, but more… well, fun!
- It lets you say “yes’ more often
- It stops you from being totally dominated by your budget
- It ensures that impulse purchases and guilty pleasures are considered, so you stay on track even when you’re going “off-budget”.
By giving yourself something to play with, you give yourself permission to have fun. That’s not a word you usually hear when it comes to budgeting!
People often stop using a budget because they overspend one week or month, then give up altogether. Discretionary spending gives you a buffer from that and lets you indulge with having to worry or excuse it.
HOW DO YOU INCLUDE IT IN A BUDGET?
There are lots of ways to do a budget so there are lots of ways to factor in discretionary spending. It all depends on your personal preferences.
There is a school of thought that every budget should be split in specific ratios to be sustainable. 50% goes to needs, 30% goes to wants and 20% goes to savings. Discretionary spending would fall into the “wants” side, alongside fixed wants costs like entertainment.
However, everybody’s circumstances are different, and ultimately how much you put into discretionary spending will depend entirely on how much you can afford. Here are a couple of ways to work it out
1. Use whatever’s left over at the end of one month (or week) as discretionary spending for the following month (or week). This makes it quite variable but ensures you don’t have to commit yourself to a specific amount every time.
2. Set aside a specific amount for fun money. They treat it like a category in their budget: groceries, debt repayments, discretionary. This keeps it fixed and regular, but if you have a particularly expensive week or month, it’s a lot less flexible.
KEY MISTAKES TO AVOID
- Discretionary spending isn’t part of your entertainment budget.
You should always set aside some money for entertainment regardless. Discretionary spending should be used for unexpected wants, much like emergency money is set aside for unexpected needs.
- Discretionary spending isn’t always necessarily for something fun.
Sometimes you just need something small but haven’t thought about it e.g. it’s now summer and you forgot to budget for a fan and now everyone is sweltering. You can use this discretionary spending here too.
- Don’t make the discretionary spending too large or too small.
Stay flexible and make sure to adjust it as necessary to fit in with the rest of your budget. Don’t wait to review your yearly budget to adjust it.
Discretionary spending is an important part of any budget, large or small. It ensures you stay in control of your budget instead of the other way around and that you can have a few guilty pleasures without guilt.
This article is solely for information purposes and is not intended to be financial advice. If you need help, please contact Avanti Finance or your financial adviser. Neither Avanti Finance nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any information, representation or omission, whether negligent or otherwise, contained in this publication. References to third-party websites are provided for your convenience only. Avanti Finance accepts no responsibility for the availability or content of such websites.