Before you shrug and claim "Oh great, another talking head telling me to cut the latte's to prepare for a recession" I will tell you that is NOT the point of this post. Today's post, dear FF friends, is for us to discuss what discretionary spending means, why it's important to discern it from other types of spending, and what makes the times we're living in a prime opportunity to revisit it.
What is Discretionary Spending?
As defined by one of the Financial Fives recommended resources, Investopedia.com, Discretionary Spending is "a cost that a business or household can survive without, if necessary" So, put simply, it's spending on things that don't have to do with putting a roof over your head or food on the table. So, take that millennial haters, avocado toast is a necessary expense! Just make it at home, if you can ;)
Discretionary Spending examples include getting your hair done at a fancy salon, a personal trainer, your daily latte, entertainment subscriptions, and yes even your house cleaner. I can't tell you how many friends think that their household services, such as landscaping, house cleaning, or pet-sitter are necessary expenses. You can clean your own kitchen, trust me it's easy.
Now, this doesn't mean cutting back by becoming stingy. If you want to go to a sit-down restaurant, get a massage, or stay at a full-service hotel, you need to budget to tip. Tipping is one of those things that may seem discretionary, but it's really not. Many service workers rely on tips to make a living wage.
Don't be that person that orders 100 custom cookies for a party to be delivered and set up, and then not tip the delivery worker.
It's kind of discretionary in a similar sense to that of a potluck. Sure, you can freeload and not bring anything, but good luck getting invited again. Do you really want the people that come into contact with your food to have negative feelings towards you?
Why Is it Important to Monitor Discretionary Spending?
Why is it important? Well, you must be diligently reading Financial Fives for a reason! It's important in several regards. The main takeaway is making sure you are not spending more than you bring in, and thus going into consumer debt. The next aspect of why it's important is to make sure your spending lines up with your value system, also known as mindful spending or conscious spending.
Being intentional with your spending enables you to be in full control of your finances, and make your money work for you rather you feel enslaved to your money. If you're spending $150 per month on a stuffy spin class membership yet hate going and never use it, this isn't being mindful about your spending. If you love cycling on the other hand and make consistent use of it, now this is a conscious spending category.
Ramit, the author of I Will Teach You To Be Rich, makes a clever analogy to his definition of conscious spending, using the "money dial". If you love to travel, you turn up your money dial and allocate more funds to longer trips or more upscale hotels. If you could care less about the kind of car you drive, you turn your money dial down and maybe settle for a 12-year-old Honda Civic because it satisfies your needs and works just fine.
As many of you know, for me, my discretionary spending includes outdoor activities, watersports, and food. So I have an REI membership that I use frequently, bought a paddleboard, and shop at Whole Foods and farmers' markets.
I don't care too much for technology, for example, which is reflected in me just recently upgrading from an iPhone 6 to a *refurbished* iPhone X, which I still felt was a splurge. I don't have any fancy watches or ankle monitor things that tell me to go for a walk because my calorie intake was higher for the day, no thanks to that!
Many people say the 50/30/20 budget is a good rule of thumb, however, if you want to be Financially Independent sooner than later, I'd say as close as you can get to the 50/50 budget the better.
The 50/30/20 means half of your money goes to your needs, 30% to discretionary spending, and 20% to savings and debt replacement. The 50/50 budget means you live off half your monthly income, and the rest goes into saving and investing.
What Makes Now Such a Good Time to check your Discretionary Spending?
So, why am I digging up the age-old lecture of monitoring your spending now? Well, for several reasons. I've written recently that we may be on the way into a recession. So, it's only wise to take a pulse check on how you are spending and what you would cut first if you had to. Do you really want to be locked into paying $3,200 for a studio loft or a $600 car payment when you could lose your job next month?
The other reason is we are living in a very socially conscious time, and that can be a good thing. Do you know where your money is going when you invest in your 401k? Do you know about the unsafe working conditions of the company you buy deodorant from? Are you comfortable with the fact that the brand that you so loyally buy your coffee from is contributing to deforestation?
With the transparency we have today, you have more tools available to find out about what the companies that you give your hard-earned money are up to, and if you agree with their practices and stances on social issues that are important to you.
Extra Income = Extra Cash
Well, what happens when you don't have the margin to cut your spending any more? That's where making more money comes in. Whether it's asking for a raise, going for that promotion, or starting a side business, there's never been an easier time to make more money than today. With a plethora of apps, service-based websites, social media queries, and a shortage of workers, you should be able to find something that you actually like to do, are good at, and is flexible with your schedule to earn extra cash.
Now, I'm not saying work yourself to death or give up your social life just so you can cling to your subscriptions. I wrote a post with my friend Olaf (Mile High Finance Guy) about the price we pay for "hustle culture". I'm just saying that if you've cut what you can and still find yourself unable to meet your necessary expenses, finding some enjoyable extra work in your downtime can help sustain you through lean times.