What is discretionary spend? It may seem one of those obvious questions to you – but to me it opens a real can of worms…
Yes, it’s that time again when I sit down and pull together our expenses for the year. I know, I know – yearly – it’s shocking, right.
I put it down to having a good idea in my head of what’s going where, money-wise.Ā Alongside not being prone to spending money without thinking about it. And I’m not usually far off funnily enough in budget terms. But whatever, that’s not the point today…
So what is the point then I hear you all ask impatiently….or can I go back to eating my cornflakes in peace?
Well, it’s this. Part of my process involves allocating an expense to either a Must or a Discretionary Spend.Ā
The idea being it’s useful to know what is the minimum spend we could live on if required. As in if all our various investments and sources went awol at the same time.
Unlikely given the amount of diversification we have in our portfolio but you know, informed is pre warned and all that.
Regardless of whether you think that’s a useful idea or not, it does bring to light the point of today’s ramble. Just what is discretionary spend?
Need Vs Want - What Is Discretionary Spend?
It may seem obvious to you but as ever, once you start delving into something you can quickly get lost down the Google-shaped rathole..
To my mind, a ‘need’ is something pretty basic and fundamental to my survival. Abraham Maslow’ infamous pyramid of needs is the classic way to illustrate this;
For those who haven’t heard of it before and want to dive deeper, this link is a good place to start.
But essentially, it’s simply the most well known way of expressing the different needs humans have in order to feel fulfilled. Whilst there’s some debate about the order, I don’t think there’s much missing here.
How I look at ‘Must’ pretty much lines up with Maslow’s first two needs ( the bottom two layers of the pyramid ). As in any expense that goes towards having a safe, warm and comfortable home. Having enough to eat.
Above that, it seems optional to me. Discretionary. I’d be able to survive without it. All be it I’d be pretty miserable if I had to do it for too long.
And so when I’m having fun with my spreadsheet, that’s how I’m mapping each transaction. Perhaps unsurprisingly this number comes out pretty small.Ā More on that another time when I’ve finished it.
But the mental exercise made me curious – how do others see it? Is there a generally accepted level of minimum spend? What do other people consider discrectionary spending?
A Global View On Discretionary Spend?
And so back into the Google rathole I went…and it turns out there’s a huge range of answers. Perhaps not too surprising but it’s fascinating stuff to read. So much so I thought it worth sharing some of the ones that stood out to me.
Starting here in the UK, according to the Gov website – it seems we currently define poverty in one of two ways;
- people in relative low income ā living in households with income below 60% of the median in that year;
- people in absolute low income ā living in households with income below 60% of (inflation-adjusted) median income in some base year, usually 2010/11
I’m not sure I see how this is particularly helpful. I mean, talk about creating a society where it doesn’t matter what you actually have – it only matters how it compares to others!!?Ā
If you stick to that way of thinking, a person could technically be in poverty whilst living very well. Especially if comparing globally.
Fortunately a few others seem to think the same and that’s where it gets interesting to see how people define their view of “Minimum Income”.
The Joseph Rowntree Foundation have built a cool minimum incomeĀ calculatorĀ where you can enter some basic details and see what the general public of the UK believe this to be.
For example, if you enter a non-pension couple with no kids, then on average across the UK this is what the UK population think makes a minimum decent standard of living;
Personally I think this is a bit of a mixed bag to me – some look high for a minimum level whereas some look low. Which is kinda the point I think.
Poverty is hard enough to define – especially once you start comparing globally. When you start trying to put together a view of what a minimum income should be – it just gets that much more complicated.
Everyone has a different view of what is “necessary” . After all, you only have to look at some of the debates between FIRE folk on how much you “need” to retire early.
Therefore I was curious to see how these definitions of minimum income compared to our own budgets and actual expenditure since I’ve been FIRE’d. So let’s see shall we?!
Contrast And Compare
So whilst not dwelling on the actual numbers – to me, some things on JRF’s minimum income list clearly fall into the discretionary spend, not a ‘Must’ spend.
E.g. as much as I love a cold frosty beer on a warm sunny day, it’s hard for me to justify alcohol and eating out as anything other than discretionary spend.
Likewise, any regular reader knows the whole point of FIRE for us was to be able to travel more but I’m still more than well aware it’s discretionary not necessary!
Back in this post I went through how our budget had compared to our FIRE plans.Ā I won’t spoil the end of that one for those of you haven’t read it yet but obviously we’ve survived š
What I didn’t include in that post though was our split between ‘Must’ and ‘Discretionary’ Spend. So here’s our ‘Must numbers;
Before I get a ton of questions about what the ‘Adjusted For Rent’ column is, let me explain. One of the big perks of building our own home was becoming mortgage-free through doing so. I.e. we don’t pay any rent or mortgage now.
Hence to make our ‘Must’ numbers a fair comparison to those from JRF I’ve added on the Ā£5,451 they allocated to rent in the previous table. I
And yes, I know some folk in London will be laughing out loud at that number but hey, it’s not my number and it’s an UK average. They do at least tell you to adjust for your own situation on the site.
So what’s the result when comparing the adjusted figures? Perhaps unsurprisingly my pretty strict definition of ‘Must’ spend is substantially lower than what the JRF calculator says I should need. Apparently we’re able to live on average on 67% of that amount.
That’s why I’ve written before about how defining your own minimum level of income is a useful exercise in figuring out when you can pull the trigger versus knowing you are working for more padding. Or plane tickets in our case I guess.
Obviously if I were to add in our total spend we are well above the JRF figures. But that’s as we always planned to be.
And that’s what’s interesting to me from this whole exercise – the different things people consider as discretionary versus necessary.
Which brings us back to the question we started with – what makes something discretionary spend? For me? For you?
What Is Your Discretionary Spend?
Otherwise known as what makes a good life for you. The big question of what makes something discretionary to you I think depends on what exactly that spend brings to your life.
For me, it’s always come down to this. Am I doing or buying something because I think I ‘should’ – or because I genuinely get value or enjoyment from it. It’s that old intrinsic vs extrinsic motivation debate.
One of the few joys of getting older is that you care less and less about impressing others. You get comfortable in your own skin, wrinkles and all. That’s pretty helpful in avoiding discretionary spend for the sake of impressing others.
But how do you know what discretionary spend is worth it? For me it tends to fall into two buckets;
1. Time Saving
This one’s all about outsourcing at the personal level. There are some things I can do well. And there are some things I am terrible at. And there are some things I just don’t possess the knowledge or physical strength to do.
In today’s world it makes far more sense for me to find somebody else with the right skills for something I need doing than to struggle through it myself. Especially back when I was still earning.
Why give up a lucrative day rate to cut down some trees when I can get some guys who actually know what they are doing. And in a fraction of the time it would have taken me! Not even taking into account the injury likelihood š
Now that I’ve left work and have more time –Ā the balance has changed. Some things it may make sense to do myself. It’s a great sense of satisfaction completing something you didn’t know you could do.
Though still not tree felling. Know thy limits…
2. Value-Adding
This type of discretionary spend is pretty much as the label says. It’s all the stuff that adds value to my life. That makes it a good life to me.
Whilst I may be able to survive on my ‘Must’ spend – most of us are lucky enough to be aiming higher than pure survival.
And it’s totally personal as to what those items are. Like in the JRF table above – I’ll choose to spend more on travel and way less on clothes. Other people would choose entirely differently.
Neither is right or wrong – the only thing that matters is that you know it adds value to your life in some way.
This is why people trying to tell you what your FIRE number should be don’t make sense to me. No-one can tell you what your budget should be. Only you know what’s going to work for you.Ā
Determining Your Own Discretionary Spend
Ah – the classic FIRE question. How then do I know how much I need? How will I know when I have enough to live happily ever after?
Unfortunately life is not a fairy tale and there are no guarantees on getting it right.
What you can do however is help yourself make a better guess.Ā
And the best way to do that is?
Live the life you want before you FIREĀ
It will be on a time-limited basis, sure. But the better idea you have about what makes a good life for you now – the better you can predict what your financial needs will be.
E.g. we travelled a lot long before I pulled the trigger on quitting. My various long-suffering bosses used to tremble every time the word ‘holiday’ was mentioned. I had a reputation š
Whilst I maxed out my annual allowance I was still limited to 5 – 6 weeks a year (sorry btw to any US readers insulted by thinking that’s not limited!). But I knew I loved it, wanted to do more of it. And with the experience of actually doing it, I had a very good way to estimate how much that would cost me.
This is why I worry a little about people who put their lives on hold to max out earning and hustling. Saving for a theoretical life. The ultimate gratification delayers.Ā
But the risk of disappointment is so much higher I think when you haven’t tried that life out a little at least.
Your minimum level is simpler to calculate, sure. But it’s the discretionary one which really makes the difference.
Basically the better you know yourself and what you want – the better your FIRE estimate is going to be. And the transition will be easier too. Try before you buy!
So – have I convinced everyone they need to start experimenting to figure out their own discretionary spend?!? Seems unlikely but hey, it helped us – so maybe it’ll help someone else. Here’s hoping anyway!
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You may find this post interesting: https://www.kitces.com/blog/the-problem-with-essential-vs-discretionary-retirement-strategies/
IMO, if you are able to estimate your future spending needs based on a broadly accurate record of previous years spending you are already ahead of the vast majority of folks. The usefulness, or otherwise, of how you have chosen to categorise your previous years spending – if at all – is then just the icing on the cake.
Hey, good to hear from you again and cheers for the link to the article, good read.
I have to admit, I like knowing how much flex I have in my budget if needed. I think that’s useful. And it’s defn encouraging when still saving to know when you’ve reached your minimum level required. A bit of an encouraging milepost.
But absolutely – the better you know yourself and your spending, the better your estimate/guess will be.
I found the Kitces post years ago and remembered it because I thought at the time (and still do) that it is interesting. The chatter in the comments is IMO, in places, even more interesting. One thing the comments do not seem to consider is that if you try to floor the total spend (TS) a likely outcome is an ever growing Upside.
Another practical E/D separation mechanism, irrespective of the spending categories you use, is to further split each each category into percentage essential, etc. This approach certainly has some benefits.
Your point re flex etc is well made. It is worth bearing in mind: most folks have no idea where their money goes and the timing of retirement is often not as foreseen, e.g. see, albeit from the US: https://www.theretirementmanifesto.com/some-fascinating-retirement-statistics/
where it states “50% of retirees retired earlier than they would have liked”.
Fascinating – hard to imagine what makes someone feel like they retired earlier than they would have liked… I can only assume they mean it was enforced and they had less money saved than they would have wanted.
Cheers for sharing.
FYI, the pie chart below the 50% statement (at the link) spell out the reasons given
Yeah, I did see that but was still curious about the way. Just my nature!
Hi Michelle,
You’ve made me want to go and have a look at my numbers (I know, I’m sadš), to see how I stack up in the need vs want debate. Inspirations for a post in the coming weeks I suspect…thanks!
Ha – who can resist a spreadsheet poke š¤£…..really must get out more….maybe when it stops raining….
I look forwards to reading what you find in a bit then! Cheers for stopping by until then.
Great post with some interesting insights.
Some types of spending are quite easy to categorise as ‘need’ or ‘want’ but there are the odd few which could be a bit of both (for me anyway)
Holidays, I would deem discriscretionary.
But a holiday can also be a need as it’s the only time I get to see my family. Perhaps I must then categorise ‘holiday to see family’ as a need, a weekend away with the girls as definitely discretionary!
Gym membership is discretionary, I could cancel the membership if I wanted to. Yet I absolutely need the gym as it keeps me sane as well as healthy and there aren’t any other forms of exercise I really enjoy doing or would do consistently.
I was recently looking at my spending and was shocked to see that my discretionary spending was higher than I thought and that was with me being relatively in control of my money!
Tightening up would undoubtedly allow me to boost my savings rate but since I consider that I’m having a decent life, it’s not something I feel that I have to do.
That minimum decent standard of living table was interesting – I wish my council tax was only Ā£22.92 a week!
Hey Weenie, fab to hear from you & cheers for the thoughtful reply,
The gym one made me stop & think actually – at what point is looking after mental & physical health a ‘must’ vs ‘need’. Interesting one to ponder….
And totally with you on the council tax – though it was how much I’m apparently supposed to spend on clothes each year that made me chuckle a little. I don’t get anywhere near that! Perhaps that’s why my Mum complains š¤£
Haha, yes! On the clothing front, I don’t think I spend that much in 5 years, never mind one! And yes, I get family complaining too, especially when I turn up in a hand-me down which they recognise from years back!
Good to hear I’m not alone on this!
You pose some interesting questions, Michelle. Thanks for sharing how you approach to some of them!
My approach has long been to classify expenditures as āneedsā (i.e. I have to; like buying groceries or paying utility bills) versus āwantsā (i.e. I choose to; perhaps a takeaway, holiday, car, or gym membership). A subjective and somewhat arbitrary grouping, but like yourself it is one I find useful.
Pretty quickly I worked out that there were some big ticket āneedsā that were largely the results of personal preference rather than survival. Choice of housing and living location, the taxes I choose to pay or avoid, and expenses associated with my investments. So I break those out into separate groups also.
This has helped me identify where patterns and changes are emerging over time, allowing for course correction if necessary. It is far from perfect, but the numbers tell a fascinating story.
Hey Indeedably, thanks for taking the time to comment.
Funny we ended up with a similar approach – I agree it’s fascinating once you let the numbers tell you the real story of what your choices and preferences cost you. What is really a ‘need’ vs what I’m choosing.
To me it’s such a liberating concept that means I can therefore choose differently if I don’t like the outcome!