Investment Glossary – Discretionary Purchases

Merriam-Webster defines “discretion” as an “individual choice or judgment.” So when we’re talking about discretionary purchases, we’re talking about purchases that are made based on your choice or judgment. Now, if we really want to pick nits, almost any choice to spend money is ultimately a choice made using your judgment. Really, even choosing to pay income taxes rather than go to jail is a choice, even though it’s one that most people make pretty easily. After all, as distasteful as paying taxes can be sometime, the food isn’t great in jail and neither is the companionship. But in reality, when we’re talking about discretionary purchases, what we are really talking about are purchases that are luxuries instead of basic necessities in a budget.

Now, when the term “luxury” is tossed around, the first things you think of might be a BMW, a vacation in the Caribbean, or a ridiculously expensive bottle of wine that most normal human beings probably couldn’t even identify as being more expensive than other wines in a blind taste test. But in fact, a luxury can be something as simple as picking up a cup of coffee from Dunkin’ or Starbucks in the morning, rather than brewing a cup at home. A luxury is hiring someone to mow your lawn as opposed to mowing it yourself. These are choices that we make, not because we “need” these things, though “need” is thrown around casually today on a regular basis. No, we aren’t actually going to die if we don’t get our cup of coffee in the morning. And here’s how we know we aren’t going to die – because when push comes to shove and you are trying to balance income and expenses, cutting out your morning cup of coffee is going to have less of an impact on your overall survival than cutting out paying for a place to live.

So when we examine how to build a budget, discretionary purchases are the ones that are typically the ones we look to cut first. And it’s important to realize that even things that seem like necessities might be discretionary purchases when you look under the hood. Let’s use that phrase to segue into an analysis of transportation needs. For whatever reason, a lot of people tend to get into trouble when it comes to spending on cars and transportation. Maybe it’s because cars are viewed as a status symbol, maybe it’s because we just have more crap we want to take with us and so we want more room in our cars, or maybe it’s because we are bad at disconnecting from our technology and need Wi-Fi and Bluetooth everywhere we go now. Regardless of the reason, people tend to spend a lot of money on cars. How many times have you heard the phrase, “Well, I’m in the car a lot and I have to go to work/pick up the kids/travel to the in-laws and I need to be comfortable when I do, right?”

No, you don’t need to be comfortable. You choose to be comfortable. According to Kelley Blue Book, new cars that were bought in December of 2018 averaged a cost of $37,577 for the month. Assuming a 20% down payment, four percent interest rate, and five-year loan, that car is going to cost the average American $554 per month. Then add in gas, insurance, and maintenance, and the total cost of ownership is up to well over $800 per month. Now, if that same person were to go and buy a car for $22,000 instead (there are plenty of cars with that price tag on the market), and used the same dollar-value down payment, the cost of ownership drops from over $800 per month to just over $500 per month. And if you have to pile the whole family into the car to visit the in-laws for a weekend, that savings could be used to rent a larger car for the weekend or fly to the in-laws instead. Beware of discretionary purchases that masquerade as necessities.

Discretionary purchases aren’t inherently bad. They become bad when they prevent you from constructing a strong financial foundation by building an emergency fund or paying off credit card debt. Choosing to buy something to make your life easier isn’t necessarily a bad thing. But it can get you into bad habits, and thus trying to figure out whether something is really necessary or just a choice of luxury pretending to be necessary is a really important step towards building a strong budget and good money-management skills.