The distinction between mandatory and discretionary spending becomes important when developing a household budget. Mandatory expenses refer to bills that have to be paid on a regular basis, such as rent or electricity. Discretionary expenses include optional items like cable television, coffee shop visits and certain types of clothing.
Mandatory Expenses Definition
Mandatory expenses usually come in the form of bills for about the same amount of money per month. These stable but necessary payments can include rent, utility payments and car loan payments. Short-term but vital expenses can also count as mandatory after the fact, such as paying to replace a flat tire. The main defining feature of mandatory bills is that the problems tied to delaying payments on these items would outweigh the potential benefits of saving the money instead.
Discretionary Expenses Definition
A household can eliminate discretionary expenses without having to face major problems such as potential eviction or having no power. Families might not want to see the digital cable go away, but cutting that bill would save money and not threaten the basic needs of life. Restaurant dining and $5 lattes at the coffee shop are examples of discretionary expenses.
When making a budget, mandatory expenses come first. After that, it is wise to set aside some money for savings, particularly for an emergency fund to fall back on in case of a job loss or some other unexpected event. Once these needs are taken care of, you can budget some money for discretionary spending. To determine the money available for discretionary expenses, take your monthly net income and subtract the monthly mandatory expenses. Next, subtract the savings you allot yourself every month. The remainder is what can go towards discretionary spending.