What is a discretionary expense account

Discretionary effort 2021

What is a "discretionary effort"

A discretionary expense is a cost that is not material to the operation of a home or business. For example, a company may allow employees to charge certain meals and entertainment expenses to the company to promote goodwill with the employees. In the home, discretionary expenses are mostly defined as things that are "needs" rather than "needs".

INTERRUPT 'Discretionary Effort'

Individuals and corporations pay for discretionary spending with free income. This number is the amount of money left after taxes and necessities are paid. A person running out of money after paying bills does not have discretionary income; Therefore, that person has to assume a debt for reimbursement of expenses. Financing a vacation with a credit card is an example of taking on debt for a discretionary expense.

Indispensable costs and discretionary expense costs

Households have two types of expenses. Certain expenses either have to be paid for by law (such as taxes and, from 2014, health insurance) or they have to be paid to keep the household running (such as rent, meals and transportation). These expenses are essential expenses because the earner does not have the option of not paying them in any given month without consequences.

Other expenses such as vacation expenses and luxury goods are not necessary for the maintenance of a household and are therefore classified as discretionary expenses. In other words, the earner can pay for these goods or services at his own discretion.

Reasons for Discretionary Spending

During tough economic times, households and businesses may need to cut spending in response to falling incomes. Therefore, it is often desirable to keep discretionary expenses separate from material expenses so that it is easy to see where and to what extent the expenses can be reduced.

A useful budgeting tactic is to rank discretionary spending in order of importance from least to most. When a job loss or reduced income results in budget cuts, household members can easily identify the first discretionary expenses to put on the chopping block.

The concept of discretion is subjective and can vary significantly between individuals and companies. For example, consider a family with two vehicles that are both making car payments. The family thinks both cars are necessary, but can get by with one vehicle if necessary. When times get tough, the family can reclassify the second car as a discretionary issue and sell it to get out under payment.