- What are discretionary expenses?
- Common discretionary spending examples
- How to identify discretionary expenses in your budget
- The needs vs. wants test
- Managing discretionary expenses effectively
- When to cut discretionary spending
- The role of discretionary expenses in financial planning
- How Ramp transforms discretionary spending from a budget drain to a strategic advantage
- Control discretionary expenses with automation
Discretionary expenses are non-essential costs that a business, household, or individual can survive without if needed. You can broadly consider them “wants” rather than “needs.”
When you’re creating a budget for your business, you know not all expenses are created equally. You have to decide which costs are necessary and which you could live without.
Differentiating between essential and discretionary expenses is a crucial part of budgeting in both business and personal finance. Understanding that difference, plus common examples and how to identify and manage discretionary items, helps you plan and make better decisions.
What are discretionary expenses?
Discretionary expenses are non-essential business costs you generally control and can postpone or cut. You may also see them called discretionary costs, discretionary spending, optional expenses, or non-essential expenses.
Key characteristics of discretionary expenses include:
- Not required for the business to function
- Flexible by timing and amount
- Based on value judgments or organizational preferences
- Easier to cut or defer if necessary
- Often irregular or seasonal
Discretionary expenses differ from non-discretionary expenses, which are essential to day-to-day operations—things like operating expenses, payroll, taxes, and inventory accounting.
Discretionary vs. non-discretionary expenses
One way to distinguish discretionary from essential costs is control. For example, a bank sets your loan interest (non-discretionary), but you choose how much to budget for an optional research initiative (discretionary).
Some expenses that are essential for one company may be discretionary for another. Consider two businesses: a supermarket (Company A) and a remote-first SaaS company (Company B). Company A’s rent is essential. Company B’s office space is discretionary because its teams work remotely.
| Expense type | Description | Examples |
|---|---|---|
| Discretionary | Non-essential, flexible costs you can delay or cut | Office perks, optional travel, marketing experiments |
| Non-discretionary | Essential, recurring costs required for operations | Payroll, rent (for on-site operations), insurance, utilities |
The key is to examine how critical a cost is to short- and long-term survival and classify accordingly.
Decision criteria
If you’re not sure whether a cost is essential or discretionary, ask:
- Is this expense necessary to keep the business running?
- Will there be serious consequences if we cancel or postpone it?
- Would the budget improve meaningfully if we eliminated it—with acceptable trade-offs?
Common discretionary spending examples
While everyone’s discretionary expenses can be different, some expense categories tend to fall under the discretionary umbrella more often than not. Here is a breakdown of common discretionary spending examples for individuals and businesses:
Personal discretionary spending examples
According to Bankrate, in 2025 consumers expect to spend less on discretionary items as prices and priorities shift. Common examples include:
- Entertainment: Streaming services, concert tickets, movies, and video games
- Dining out and takeout: Restaurant meals, delivery, coffee shop visits, and alcohol in bars or restaurants
- Hobbies and recreation: Craft supplies, music lessons, sports equipment, and collectibles
- Travel and vacations: Airfare, hotels, rental cars, theme parks, and cruises
- Fitness and wellness beyond basics: Gym memberships, personal training, boutique classes, and fitness apps
- Personal care extras: Massages, facials, hair coloring, manicures and pedicures, and cosmetic dental work
- Home and lifestyle upgrades: Décor, nonessential furniture, and smart home gadgets
The same categories can be healthy spends when they support well-being or relationships. They become problems when they crowd out essential bills or savings goals.
Business discretionary spending examples
Examples of business discretionary spending include:
- Team events and employee recognition: Holiday parties, offsites, social outings, and gifts
- Office amenities and perks: Snacks, catered lunches, high-end coffee, and game rooms
- Optional conferences and field events: Trade shows, networking, speaking slots, and related travel
- Premium software tiers and add-ons: Enterprise upgrades, lightly used AI features, and extra seats beyond utilization
- Marketing experiments and brand plays: Sponsored content, influencer tests, paid social pilots, and swag
- Professional development beyond mandatory training: Workshops, certifications, and courses not required for compliance
- Workspace choices for remote teams: Coworking stipends, optional office leases, and décor upgrades
- Hardware refresh cadence above necessity: Annual laptop swaps and peripheral upgrades for convenience
How to identify discretionary expenses in your budget
Recognizing the difference between discretionary and essential expenses is key to budgeting, especially when you need to streamline costs. Use this simple process to review and classify your spend.
1. Track your spending
Pull several months of bank statements, card transactions, and receipts. Log them in a spreadsheet or budgeting tool so you can see totals and trends over time.
Tools for tracking include:
- Spreadsheets
- Expense management software
- Expense journals
- Budgeting apps
2. Categorize your expenses
Group transactions into common business expense categories that reflect how you operate today, such as:
- Rent, lease, utilities
- Payroll
- Office supplies
- Marketing and advertising
- Travel and entertainment
- Subscriptions
If a category is too broad to act on, break it down one level (for example, “subscriptions → engineering tools, finance tools, sales tools”).
3. Apply the needs vs. wants test
For each line item, ask:
- Is this essential for operations right now?
- What happens if we remove or delay it for a quarter?
- Is there a lower-cost alternative or usage cap that preserves the benefit?
- Are we paying for legacy preferences rather than current needs?
Tag each item as essential, discretionary, or review.
4. Total your discretionary spending
Add up the discretionary and review items. As a practical benchmark, around 30% of the budget for discretionary items aligns with the 50/30/20 framework; if you’re well above that, flag areas to trim or time-box.
5. Identify opportunities to reduce or reshape
Prioritize high-impact items and set limits where value is uncertain. Plan large one-off spends in advance, and cap categories that tend to sprawl (like travel or software seats). If something is discretionary but clearly supports revenue or retention, note that rationale so it isn’t cut reflexively later.
The needs vs. wants test
When you’re running a small business, every dollar matters. You need to be able to justify the impact any expense will have on operations, profits, and growth. One effective budget management strategy is to use the needs versus wants test.
Business needs encompass essential expenses directly tied to delivering your product or service, supporting infrastructure, operations, and communications, as well as ensuring legal compliance. On the other hand, business wants enhance but are not critical to your day-to-day operations. They may offer upgrades or convenience, but ultimately, they can be delayed or canceled without a significant impact on your business.
Here are a few examples to help illustrate how to apply the needs versus wants test:
| Business expense | Need vs. want | Why |
|---|---|---|
| Office space and furniture | Need (for on-site teams) | Required workspace for operations and collaboration |
| Branded pens and notepads | Want | Nice to have; minimal operational impact |
| Accounting software | Need | Enables cash flow tracking, compliance, and tax preparation |
| Yearly computer upgrades | Want | Often can be deferred unless devices fail or security requires it |
| Project management tool | Need | Core to workflow, coordination, and delivery speed |
| Pizza Fridays | Want | Can support morale, but not required for operations |
Common misconceptions
You can apply the needs versus wants test differently across distinct businesses or industries. But before you do, it’s worth considering some of the common misconceptions:
It’s tax-deductible, so the expense is justified
Many business expenses are tax-deductible, but that doesn’t mean they’re all right for your budget. Prioritize the things that you need above potential tax benefits for purchases you want.
Anything that enhances the brand is a need
Brand investment is important. But every time you decide to put your logo on swag, make sure you know how it will contribute to your ROI.
We want to do what competitors do
Prioritize your spending based on your business goals and strategy. Understanding your competitors is essential, but it’s not worth overspending to get caught up in the rat race.
Managing discretionary expenses effectively
Planning for discretionary expenses also involves using systems and strategies to manage your discretionary spending. If you fail to monitor and track your discretionary budget, your expenses might increase too quickly, leaving you with unsustainable margins and no emergency fund for your business.
These are six strategies to prevent discretionary spending from getting out of control:
1. Measure expense ROI
Spending that doesn’t offer sufficient ROI is a common mistake. This happens due to a lack of recurring expense tracking and feedback. Take the time to record and track all your expenses. Categorize the business impact of every spending decision, and you'll be able to measure ROI. Remember that not all expenses offer a clear quantitative return. For instance, you might struggle to measure the impact of a new HR software subscription. However, this expense might be justifiable if it reduces employee onboarding time.
2. Categorize and track trends
Tracking trends in discretionary expenses is crucial to maximizing your spending. Tracking trends in your expense reporting provides benefits like:
- Revealing your changing needs via your spending patterns
- Giving insights into efficiencies to see if you’re spending too much time on manual processes that an app or tool could automate
- Anticipating costs based on past spending throughout the fiscal year
- Exposing seasonal trends in your business
Breaking your spending into business-relevant categories helps you quickly isolate problem areas. You can dig deeper into specific processes and create greater efficiency. The result is optimized spending and a better understanding of your discretionary spending limits.
3. The 50/30/20 rule
If you’re having trouble managing your budget, consider the 50/30/20 rule. This personal finance rule may not apply to every business, but it can at least serve as a starting point as you consider your discretionary spending.
The 50/30/20 rule says that you should budget your spending based on this breakdown:
- 50% to needs
- 30% to wants
- 20% to savings
While this is generally recommended for individual budget planning, it can also serve as a basic guide for business spending planning. This means 50% of your income goes towards fixed costs, 30% towards discretionary expenses, and 20% towards planning for the future.
4. Establish a cash margin of safety
In times of unexpected turbulence, it’s essential to examine your discretionary spending and reduce expenses. Some companies drastically reduce spending, which can negatively impact employee morale and potentially damage vendor relationships.
Most companies believe that a six-month cash buffer is the most effective, but take the time to decide what works for you. A cash margin of safety or reserve helps you scale your cost-cutting efforts gradually, analyze your discretionary expense trends, and create ideal spending levels without disrupting current workflows.
5. Set up an expense review process
Take the time each quarter to review your current discretionary spending with your finance team and stakeholders. A review process helps you stay on top of your company's needs. You may discover that some expenses have become non-discretionary. For example, sales travel spending may have become essential because of changes in your product lines or client portfolio. Create review processes at logical business intervals, and you'll elevate your financial performance.
6. Define and enforce expense policies
One of the most effective ways to manage discretionary spending is to establish a clear expense policy. By doing so, you can automate expense approval and free your employees' time for value-added tasks, such as analyzing expense trends and identifying opportunities for cost savings.
A good expense policy defines spending limits by department or specific expense categories. These limits help you model worst-case expense scenarios and calculate margins. Make sure you involve department stakeholders before setting expense limits.
Tips for cutting back on discretionary costs
When things are a little tighter, and you’re looking for ways to reduce your budget, consider these tips for cutting back on non-essential spending:
- Negotiate contracts and subscriptions: Contact vendors to renegotiate terms or explore deeper discounts
- Leverage data: Use analytics and spending trends to identify low-impact programs to pause or cut
- Go virtual: Opt for video calls with customers or vendors to avoid travel costs
- Encourage a cost-conscious culture: Train teams to spend responsibly and trigger automatic spending reviews when revenue dips
When to cut discretionary spending
There are times in a company’s lifecycle when you need to consider cutting discretionary spending. Here are some red flags to look out for:
- Reduced profit margins
- Declining cash reserves
- Cash flow problems
- Increasing reliance on credit
- Failure to meet growth targets
If you are experiencing any of these red flags, it’s time to make some cuts. Prioritize your cuts in this order:
- Employee perks or programs with low engagement
- Non-essential travel and entertainment
- Underutilized software, subscriptions, or tools
- Recurring low-impact marketing spend
- Non-strategic events, sponsorships, or brand opportunities
Times of financial uncertainty can be tough on your team, so remember to keep morale in mind. Clearly communicate the rationale to your team so they understand why you are making these cuts. Ask for feedback so your team feels heard. Stay focused on the future to reinforce that you’re looking toward long-term growth and sustainability.
The role of discretionary expenses in financial planning
Discretionary spending may not always be essential to your day-to-day business operations, but it can play a role in driving innovation, improving company morale, and building your brand.
Discretionary spending can help you:
Build office culture
Offering employee perks, professional development opportunities, wellness programs, and team-building exercises can support talent retention, reduce turnover, build morale, and, ultimately, boost productivity
Drive business development and innovation
Things like one-off marketing campaigns, networking events, pilot programs, and research and development are often categorized as discretionary, but are critical for brand exposure, revenue growth, and staying competitive
Stay agile
When you have a pool of funds in your budget for discretionary expenses, it gives you the flexibility to act on new opportunities and the agility to respond to challenges without majorly disrupting your operations
With those considerations in mind, discretionary spending should always be goal-focused and intentional. Aligning your discretionary expenses with your financial strategy helps drive revenue growth, enhance brand equity, and improve operational efficiency.
Balancing savings and strategic spending
In your personal budget, you need to strike a balance between saving and enjoying your life. Likewise, businesses need to consider when to retain funds for growth versus strategic budgeting and spending that contributes to long-term growth. As best practices, allocate a percentage of your revenue each quarter for goal-focused discretionary spending and evaluate the ROI to determine if the expenses are justified.
Building a sustainable discretionary budget
There isn’t a one-size-fits-all budget template for a discretionary budget. If you follow the 50/30/20 rule, that means 30% of your budget will be set for discretionary spending. But what’s the best way to allocate those funds?
Here’s how to spend your discretionary funds at different annual revenue levels:
- Under $1 million: Focus on operational tools, team development, and marketing
- $1–10 million: Scale your marketing efforts, offer team perks, and invest in research and development
- Over $10 million: Scale your operations, focus on innovation, and optimize your business for ROI
Another way to consider the question is how to adjust your discretionary spending based on circumstance or growth stage:
- Startups: Focus on customer acquisition and product development
- Growing organizations: Expand infrastructure, team culture, and marketing
- Established businesses: Prioritize employee retention, innovation, and brand equity
- Reacting to an economic downturn: Focus on high-ROI initiatives and make cuts to non-essentials
Tips for guilt-free discretionary spending
Just because discretionary expenses are non-essential doesn’t mean they’re frivolous. Follow these four tips to optimize your discretionary spending:
- Be intentional with budgeting: Establish clear categories for discretionary expenses and set reasonable caps so you stay within budget
- Establish clear KPIs: For every expense, understand what success looks like and how to measure ROI
- Focus spending on your values: Always point to your company’s mission as your north star when making strategic decisions about spending
- Review spending regularly: Make sure to give new initiatives time to develop, but review your spending regularly to analyze the short-term and long-term impacts
How Ramp transforms discretionary spending from a budget drain to a strategic advantage
Discretionary expenses can quickly spiral out of control without proper oversight. Finance teams often struggle to balance providing employees with the necessary flexibility while maintaining visibility into where every dollar is spent.
Ramp's expense management platform tackles this challenge head-on with real-time spending controls that put you in the driver's seat. Instead of discovering overspending weeks later when reconciling statements, you can set precise spending limits for each employee, department, or expense category before purchases happen.
Need to cap monthly software subscriptions at $5,000? Done. Want to limit team lunch spending to $200 per week? You can set that up in minutes. These controls update instantly, so when an employee tries to make a purchase that exceeds their limit, the transaction simply won't go through.
But control without insight is only half the equation. Ramp's automated expense tracking gives you a bird's-eye view of discretionary spending patterns across your organization. The platform automatically categorizes expenses and flags unusual spending patterns, so you can spot trends before they become problems. You'll see exactly which departments are approaching their discretionary budgets, which vendors are eating up the most spend, and where you might have opportunities to negotiate better rates.
The real game-changer is how Ramp connects spending data to actual business outcomes. By integrating with your existing accounting software, every discretionary purchase flows seamlessly into your financial reports with proper coding and documentation.
This means you can finally answer questions like whether that new coffee machine actually improved employee satisfaction or if those premium software subscriptions delivered the productivity they promised. With Ramp, discretionary spending becomes a strategic tool for growth rather than a line item to trim.
Control discretionary expenses with automation
Discretionary expenses can quickly become out of control if you don’t track your spending. With Ramp, monitoring and streamlining your discretionary budget is simple.
Regardless of market conditions, you’ll stay on top of your spending, helping your business save money. See why Ramp customers save an average of 5% annually with our interactive demo.
FAQs
Regular monitoring improves financial health and expense control. You’ll often find ways to reduce costs and boost margins and cash flow. It’s typically harder to reduce non-discretionary obligations such as loan interest, credit card charges, or utility payments.
Fixed expenses recur at similar amounts from period to period, while discretionary expenses are optional. Some fixed costs (for example, subscriptions or office leases for remote teams) may still be discretionary in practice, so categories can overlap.
They can be if they’re ordinary and necessary for your business. For example, travel to meet a customer can be both discretionary and deductible if it’s reasonable and business-related. When in doubt, consult a tax professional.
Reimbursements should follow a clear company policy. Many discretionary items may qualify, but it’s up to your business to define what’s reasonable, which categories are eligible, and how reimbursement works.
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