Managing Discretionary Spending: Examples & Tips for Financial Wellness
Being smart about how you spend money in a business is really important. It means thinking carefully about where your money goes so it’s used in the best way possible. According to PwC’s 2024 report, organizations with integrated financial and operational strategies see a 12% higher return on investment. This highlights how thoughtful spending isn’t just a good habit—it’s a key to achieving better results.
Learning how to plan and control where your money goes is key in making sure you’re on track. Whether it’s about everyday costs or planning for the future, knowing how to tell different types of expenses apart helps businesses and people stay on top of their finances.
One type of expense worth understanding is a discretionary expense. These are non-essential costs, like extras that aren’t necessary but can still make a difference. But what exactly are discretionary expenses, and why is it helpful to know about them?
Why It’s Important to Understand Discretionary Expenses in Business
Discretionary expenses are costs that a business chooses to spend money on, but these are not absolutely needed for running the business every day. These are the “extra” expenses that can improve or grow the business but aren’t required for its basic survival. For example, things like marketing, giving employees extra perks, or attending events are considered discretionary expenses.
It’s important to understand discretionary spending because it helps you manage money better. When you know where your money is going, you can make smarter decisions about where to spend and where to save. Spending too much on these extras could harm your cash flow, while spending too little might stop the business from growing or getting better.
Non-discretionary expenses, on the other hand, are the recurring costs you can’t avoid, like paying rent, utility bills, employee salaries, or taxes. You’ve got to cover these first to keep the business running smoothly.
Here are some examples of discretionary expenses businesses might have:
- Marketing and ads
- Training programs for your team
- Company events or team-building activities
- Travel for meetings or conferences
- Redecorating or upgrading the office space
- Sponsoring events or organizations
- Extra software tools or apps
- Hosting lunches or entertainment for clients
How to Manage Expenses That Aren’t Essential for Daily Operations
Managing discretionary expenses—things your business doesn’t need to run every day—requires careful planning and smart choices. These costs can help your business grow, but spending too much can cause problems. To manage them well, you need to plan ahead, spend wisely, and stick to a budget.
1. Set Clear Priorities
Make a list of the discretionary expenses that bring the most value to your business. Prioritize the ones that directly support growth or efficiency. For example, if attending a conference can help you connect with potential clients or partners, it’s worth allocating money for that over something like redecorating the office. Always ask yourself if the expense is truly needed or just “nice to have” before spending.
2. Create a Budget for Discretionary Spending
Plan how much you’ll spend on these extra costs by setting aside a specific amount or percentage of your revenue. Break the budget into categories like marketing, employee training, or travel. For instance, if your business earns $100,000 per month and you decide to spend 10% ($10,000) on discretionary costs, you could allocate $5,000 for marketing, $3,000 on training, and the rest for events or software tools. This keeps your spending organized and manageable.
3. Track Spending Closely
Use tools like apps or spreadsheets to keep an eye on exactly where your money is going. Compare your spending against the budget you’ve created and look for areas where you might be overspending. For example, if you planned $2,000 for office improvements but are halfway through the month and have already spent $1,800, it’s a sign to cut back or stop further spending in that area until the next month.
4. Measure the Benefits of Each Expense
For every discretionary cost, think about the return on investment (ROI). Ask yourself what the business gains from the money spent. For example, if you spend $3,000 on a marketing campaign, check if it has brought new sales or customers. If not, consider shifting those funds toward strategies that bring better results in the future.
5. Plan for Seasonal or Rare Expenses
Some discretionary costs don’t happen monthly, like attending an annual conference or hosting a holiday party. Prepare for these by spreading out the cost over time. For example, if attending a conference will cost $4,800, you could save $400 each month so the expense doesn’t strain your budget when the event arrives.
6. Look for Ways to Save
Don’t overspend just because an expense is “optional.” Compare vendors for better deals or modify plans to save money. For instance, if you’re planning a team-building event, hosting it onsite or finding low-cost activities might be just as effective as renting an expensive venue. Small savings can add up over time.
7. Review and Adjust Every Few Months
Regularly check whether your spending plan is working. Look at what you’ve spent, identify which expenses were worth it, and make changes for the future. For instance, if sponsoring an event didn’t boost your visibility or sales, reduce that budget and use the funds for more valuable areas like employee training or new client outreach.
Examples of Budgeting for Different Types of Expenses
Here’s how you can plan and budget for common discretionary costs:
1. Marketing and Advertising
Set aside a percentage of your earnings, like 5-10%, for marketing efforts. Keep track of how each type of marketing performs, such as ads or social media, and put more money into the ones that bring the best results.
2. Employee Development Programs
Decide on a specific amount to spend per employee each year, like $500. Plan training sessions ahead of time and pick ones that fit the business’s needs or help employees in their roles.
3. Travel for Conferences or Networking
Book trips early to get discounts. Include all costs—like flights, hotels, and food—in your plan. After each trip, look at what benefits you gained, such as new clients or partnerships, to know if it was worth it.
4. Team-Building Events
Plan a budget once or twice a year for team activities. Choose affordable options like in-office events or smaller outings that build morale without overspending.
5. Software Subscriptions or Tools
Check which subscriptions your business uses and cancel ones you no longer need. Focus your spending on tools that help your team work better or save time.
Bringing It All Together: Smarter Spending for Everyone
The tips for managing discretionary expenses in a business can work just as well at home. For instance, you can set a budget for fun activities like dining out or family outings, track where your money goes, and focus on what’s really important. Learning how to handle your money wisely, whether for work or daily life, makes a big difference. It helps you stay out of debt, lower stress, and save for the future. You can make your home and business more secure and prosperous by developing sound financial habits.
