Step 11: Identify your Discretionary Expenses

Discretionary expenses are expenses for thing that you don’t absolutely need in order to survive or run your household. They are often optional (some would even argue unnecessary) expenses that mainly enhance your day-to-day life and make it more fun. Think about dinners at the restaurant, holidays and a trip to the cinema. To give a definition of a discretionary expense, it:

1. is an expense of a variable amount that you have more or less complete control over;
2. might or might not have a regular time interval;
3. is not needed for day-to-day living;
4. you can cut out all together relatively easily.

Discretionary expenses are usually the type of expenses that people cut back on first during tough financial times, and also the first ones that increase again when their economic situation improves. That coffee you get every day at Starbucks on your way to work? That’s a discretionary expense: you have complete control over it, you don’t need it for day-to-day living, and you can cut it out all together and make your own coffee when you get to work or bring one in from home in a thermos flask.

Despite this clear description, as we already saw in the previous step, there is unfortunately no 100% guaranteed distinction between a variable and discretionary expense. Is a gym membership an essential expense or not? What about your mobile phone plan? Any distinction is slightly arbitrary and with time you might move an expense from variable to discretionary expenses or the other way round.

.Step 11 – Identify your Discretionary Expenses – in detail:

• As with the last two steps, start by putting together a list of any discretionary expenses you can think of. You might have to rack your brain a little more as many of these won’t be regular expenses.
• Think about the following areas:
  • clothes
  • dining out: bars, restaurants
  • entertainment: theatre, cinema, concerts
  • holidays and days out: theme parks, city trips, hotels, transport
  • presents
  • personal care: hairdresser’s, manicure
  • hobbies
  • books and magazines
  • TV and music subscriptions (cable, Netflix, apple music, Spotify)
  • courses or classes
  • home decoration
• When you can no longer think of other examples, go through your bills, online bank statements or receipts and check whether you have forgotten anything.
• Now for the hard part: as these expenses can vary quite a bit, you might have to spend more time calculating how much you spend on each category on average. Don’t worry too much about having to be completely spot-on, but you will want to put in a relatively accurate figure to work from in future steps.
• Depending on your personal situation you might need to research more or less months back. For example: do you buy clothes every month? If so maybe you more or less spend the same amount every month. You might not go shopping for new clothes every month though and only go every 3-4 months, or even just once per season or year. In those cases you will need to go further back to find out what you spend on average or try to estimate it as best as you can.
• Write down the average monthly expense per category (remember that if you go shopping just once per 6 months for clothes and spend $300, your monthly average for clothes is $50!), until you have a fairly accurate figure for each expense.

That was probably the hardest one, which is why I left it to last (or almost last as there’s one more expense areato go). For now rest assured that you have yet again finished another step and that you are well on your way on your mission to financial independence.