Discretionary expenses are any type of expense that is not considered to be essential to the operation of the home or business. As opposed to variable expenses, which are considered necessary to enjoy and equitable standard of living, a discretionary expense is something that enhances that basic standard, but can also be avoided if circumstances make this necessary. Many people set aside funds that are outside the usual budget as a means of having resources on hand to indulge in purchases that are discretionary in nature.
The easiest way to understand the idea of a discretionary expense is to take a look at the home budget. In order for a household to operate, several line items are considered essential. One of these line items is food. To this end, the budget will provide for a fixed maximum amount of food purchases during the budget period, with the understanding the food will be prepared in the home and meet the basic nutrition requirements of the residents. This budget line item is considered to be a variable, or necessary expense of maintaining a decent lifestyle.
However, not all forms of food acquisition and consumption qualify as a variable expense. Gourmet meals ordered and enjoyed in a fancy restaurant are extremely enjoyable, but they are beyond the scope of a basic living need. Instead, this type of activity would be classified as a want. Thus, the cost of the meal is considered to be a discretionary expense, as the choice to dine out was decided at the discretion of the consumer.
Businesses also incur expenses that are classified as discretionary in nature. Basically, any expense for goods and services that are not used in the essential day to day operations of the business would be classified as a discretionary expense. Some common examples include the costs of entertaining a visiting client, ordering pizzas in for the office staff, buying an appliance with company funds that makes the workplace more comfortable for the employees.
There is often some difference of opinion as to what is actually a necessity and therefore a variable expense and what constitutes a true discretionary expense. For this reason, homes and businesses often are left to determine whether a particular expense is truly a need or simply a want that makes life more pleasant. In the case of homes, this determination is more or less based on the decisions of the adults in the home. However, businesses usually have to comply with government tax regulations when determining whether a given expense is variable or discretionary.