Nondiscretionary and Discretionary Expenses

Now let’s talk about two terms that are closely related to budgeting: nondiscretionary expenses and discretionary expenses.

Simply put, nondiscretionary expenses are needs: expenses that you must pay. These include expenses related to food, shelter, utilities, tuition and books. In the short term, it is difficult to reduce these expenses significantly.

With good planning, you can make changes over time to cut back on nondiscretionary expenses.  Don’t get stuck thinking that you CAN’T change nondiscretionary expenses. Many people wind up in foreclosure and bankruptcy court because they did not make “big” changes in nondiscretionary categories like housing and transportation. In fact, if you make wise decisions in these categories, you are going to have lots of extra money to spend for your discretionary expenses.

Discretionary expenses are often called “wants.” These are expenses related to non-necessities. For example, a cell phone with a data plan and a GPS. While the phone itself may be a nondiscretionary expense, the extra service plans can be considered discretionary. Other discretionary expenses include: restaurant meals, movie tickets, cable television, music downloads, video games and new clothing.

Don’t wait until you graduate and start your “real life” to start budgeting. Do it now. If you are living off of loans and parental support, you want to have a good grasp of what your monthly living expenses are. This will make your transition to post-college life easier when your financial life usually becomes more complicated. Tackling additional bills (student loans now come due) and having to make decisions on your new job’s 401k plan contributions will be handled with much more confidence after having mastered living on a basic budget.