Necessary vs. Discretionary

by Glenn J. Downing, MBA, CFP®

The foundation for any sort of financial planning begins with cash flow management.  Income -expenses = dollars available to be invested toward future goals.  We’ve worked with people from all walks of life who have cash flow issues, including those with very high incomes.   It all comes down to the same thing:  you have two choices.  Increase income or cut expenses to make savings happen.

 To frame the thinking here, I challenge clients to separate out necessary spending from discretionary spending.  Necessary spending is just that:  what must I spend to house myself, feed myself, clothe and groom myself, and get back and forth from work.  Bare bones, in other words. 

 The exercise I bring to my readers then is this:  Let’s look at every expenditure you’ve made in the last several months.  Now sort them:  necessary or discretionary.  Here’s a basic list: 

             Necessary                                                     Discretionary

Rent/Mortgage                                            Landscaper

Electric bill                                                    Housekeeper

Water bill                                                      Exterminator

Homeowner’s Insurance                           Life Insurance

Property tax                                                 Disability insurance

Association fee                                            Tuition

Mobile phone                                              Children’s activities

Home WIFI                                                   Lessons/tutoring

Car payment                                                Restaurant meals

Gasoline                                                       Snack food

Sunpass                                                        Entertainment

Groceries                                                      Adult beverages

Minimum debt payments                          Cigarettes and tobacco products

Daycare                                                        Gym membership

Clothing                                                        Sporting goods

Prescription drugs                                      Gifts

Basic toiletries                                             Dry cleaning

Haircuts                                                        Dress shirt laundry

                                                                       Books

                                                                       Online subscriptions (Netflix, etc.)

                                                                       Print subscriptions (NY Times, etc.)

                                                                       Pet food and pet expenses

                                                                       Travel and vacations

                                                                       Boats/boating expenses

                                                                       Golfing

                                                                       Tattoos

                                                                       Designer anything

                                                                       Hair coloring

                                                                       Manicure/pedicure

                                                                       Land Line

                                                                       Recreational vehicles

                                                                       Second/additional vehicle

                                                                       Charitable giving

 This list has some concessions to modern life, as you can see.  I’m listing mobile phone and home WIFI as necessities, since many people are able to and do work at least partially from home.  Do you have any other entries for the list? 

 The vast majority of people, if they stuck to the necessities and some of the discretionary spending, can make their budgets balance.  So I leave it to my readers:  if you’re not saving enough, scan down the discretionary column, and see what you can live without, in order to have money to save to achieve your financial goals.  And it isn’t even so much a matter of doing without as it is substituting one thing for another.  An evening at home with good friends and a deck of cards can be much more pleasurable than an evening out at an entertainment venue, and much less costly.  A book from the library reads just the same as one purchased.  A generic handbag holds the same stuff as a designer bag. 

 If that still doesn’t work, and you just cannot free up investable funds, then you’ve most likely got some bitter medicine to take, and that’s best done in one big gulp:  sell the car; sell the boat; make the hard decisions you already know you need to make. 

 Questions?  Thoughts?

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