Even without realizing it, the concepts of discretionary and non-discretionary spending have been applied by anyone who has found themselves in the position to make a monetary decision. From the government of a country, to the executive Board and management of a corporation, to the breadwinner of a household, these types of spending are practiced on a regular basis.
Investopedia defines discretionary income as “The amount of an individual’s income that is left for spending, investing or saving after taxes and personal necessities (such as food, shelter, and clothing) have been paid”. Based on this definition alone, we can clearly see two separate categories of spending: mandatory or obligatory spending, and optional or selective spending. Of the two, the category in which you can make a decision on how your money is spent is discretionary spending while the money which has to be put aside for taxes and necessities is non-discretionary spending.
At a personal level, mandatory or non-discretionary spending may include such things as taxes, rent, bills, etc. which are usually budgeted first from a person’s income. After the money for these necessities have been allocated, the discretionary spending may begin. This may include saving, investing, or spending the money on luxury items, entertainment or other things that the person can live without.
On a corporate scale, non-discretionary spending may include similar items to those shown above, but can be extended to salaries and allowances, maintenance costs, matured debts and relevant fees. Discretionary spending at this level may include managing the investment portfolio, productivity bonuses, and the purchase of items for the office and staff.
At the level of the Government, the spending becomes a lot more complex although the categories remain the same. In the US non-discretionary spending makes up approximately two thirds of the federal budget. This spending is allocated mainly to programs such as the Social Security program and other entitlement programs. Discretionary spending for the Government is governed by the appropriations act and is subject to authorization by Congress. This apportionment may include budgeting for housing assistance, education and some health programs.
In managing any budget, large or small, most people and entities tend to separate their needs from their wants. In doing so, the two concepts discussed have been applied. The assignment of funds to mandatory or compulsory expenses and then the utilization of the remaining funds is the principle of discretionary and non-discretionary spending in its simplest form.