Discretionary expenses
Household spending that is not essential and can be cut if money is tight — entertainment and lifestyle wants, as against the mandatory and essential living expenses that come before them in a budget.
In plain language
Not every rupee a household spends is spent out of necessity. A budget separates spending into three levels. Mandatory expenses — taxes, loan EMIs — must be paid, no choice involved. Essential living expenses — groceries, rent, transport — are needed for daily life. What is left is discretionary expenses: entertainment, lifestyle spending, the things a household can live without if it has to.
This last category is where a budget usually has room to give. When income falls short of what a household needs to save, discretionary expenses are the first place an adviser looks to find the gap.
How it works
The workbook's four-step budgeting process places discretionary expenses last, after mandatory and essential living expenses have already been deducted from income: list total income, deduct mandatory expenses to get disposable income, deduct essential living expenses, then deduct discretionary expenses — what remains is savings.
In the ABC Family's sample household budget, discretionary expenses total Rs 15,000 a month: Rs 5,000 on entertainment and Rs 10,000 on lifestyle expenses, against Rs 64,000 of essential living and mandatory expenses combined. Much of the work of "rationalising" a household's expenses to raise its savings ratio happens by trimming this discretionary category specifically, since mandatory and essential spending has far less room to give.
A worked example
The ABC Family earns Rs 1,37,000 a month combined. After Rs 21,000 of mandatory expenses (PF contribution and tax) and Rs 12,000 of loan repayment, and Rs 64,000 of essential living expenses (grocery, education, rent, transport, telephone, utilities), the family spends:
| Discretionary item | Amount |
|---|---|
| Entertainment | Rs 5,000 |
| Lifestyle expenses | Rs 10,000 |
| Total discretionary | Rs 15,000 |
If the family needs to raise its savings, this Rs 15,000 — not the Rs 12,000 loan EMI or the Rs 64,000 of essential living costs — is where an adviser would look first, because it is the only category the family can reduce without disrupting its mandatory obligations or daily needs.
Why NISM asks about it
Chapter 3 (Cash Flow Management and Budgeting), Table 3.1 (Monthly Household Budget), and section 3.4 (Budgeting and forecasting), both work with discretionary expenses as the last, most flexible layer of a household budget. Expect a question using the household budget table to compute discretionary expenses, or one asking which expense category an adviser should target first to raise savings.
Common exam traps
- Discretionary expenses are deducted last, after mandatory and essential living expenses — reversing this order in a budget calculation gives the wrong savings figure.
- Do not assume every entertainment or lifestyle cost is automatically discretionary in every case — the workbook notes that some spending, such as a child's education, can look like a discretionary or consumption cost but actually functions as an investment in the family's future income.
- Cutting discretionary expenses is the usual first lever, but the workbook does not treat it as the only one — a formal debt rescheduling may also be needed if mandatory expenses themselves are the source of the strain.
Check yourself
1.In making a budget, what is left after deducting mandatory expenses from total income?
- a)Savings
- b)Disposable income
- c)Net worth
- d)Monthly surplus in hand
Show the answer
Answer: (b) Disposable income
Step 2 of the four steps is: "List and deduct the mandatory expenses from the total income. WHAT IS LEFT IS THE DISPOSABLE INCOME." Essential living expenses are then deducted, followed by discretionary expenses, to arrive at savings.
2.Which category of expenses does the chapter describe as those that can be cut if there is a need to control total spending?
- a)Mandatory expenses
- b)Essential living expenses
- c)Discretionary expenses
- d)Non-recurring expenses
Show the answer
Answer: (c) Discretionary expenses
"Finally comes the DISCRETIONARY EXPENSES and these are the expenses that CAN BE CUT in case there is need for a control on the total amount spent." Mandatory expenses must be compulsorily spent and essential living expenses are necessary for daily use.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Debt servicingAll payments a borrower owes a lender, whether principal or interest — the actual monthly outflow that every EMI, card payment and instalment adds up to, before it is turned into any ratio.
- Essential living expensesThe spending a household needs for daily life — groceries, rent, transport, utilities — that comes after mandatory expenses but before discretionary spending in a household budget.
- Financial assets ratioThe share of an investor's total assets held in financial form — shares, deposits, mutual funds — rather than physical form such as gold or real estate, expressed as a percentage.
- Mandatory expensesThe first layer of a household budget: amounts that must compulsorily be spent — tax, loan repayment and provident fund contribution — before essential living or discretionary spending.
- Expenses ratioAnnual recurring expenses divided by annual income — the share of a household's earnings consumed by regular living costs, and the exact mirror of the savings ratio.
- Cash flow mismatchA timing gap in which money going out falls due before money coming in arrives — so a household that earns more than it spends can still run short of cash and be pushed into costly borrowing.
- EPFOThe Employees Provident Fund Organisation — the body that administers and supervises the Employee Provident Fund for private-sector employees, into which both employee and employer contribute towards retirement.