Understanding discretionary expenses is more difficult, because they don’t occur with the same regularity. These might include expenses for vacations, birthday or holiday gifts, restaurants, theater tickets, and the like.
So, how do you track discretionary expenses? One increasingly popular way is to use an app. There are many available today. An online search for “budget apps” or “spending tracker apps” will yield a variety of options, and one or more might be well suited to your needs.
Other people are comfortable tracking expenses using Excel of Quicken or similar software packages. It really doesn’t matter how you do it, as long as it’s something that works for you.
Once you have the method in place, subtract your fixed and discretionary expenses from your monthly household income. The amount left over can then be redirected to help achieve your longer-term financial goals.
For example, some years ago I had a client who enjoyed coffee and purchased several cups a day, perhaps including some lunches out. After tracking expenses, she realized that if she just cut back a few cups or a few coffee-drinking occasions a week, she could fairly quickly save enough money for a vacation she wanted to take. It was a matter of realizing just where her discretionary money was being spent.
A key question for people nearing retirement age is “what would be the ideal level of spending to maintain my lifestyle in retirement?” And, for the most part, discretionary expenses define one’s lifestyle.
If you have been actively and accurately tracking those discretionary expenses, you will have a pretty good idea what amount of spending you will need in retirement to continue your lifestyle. With this information, a financial advisor can help build a plan to acquire the resources needed to fund both your short-term and long-term goals.
A spending plan, then, makes sense today – and perhaps even more sense for tomorrow.