Each of us makes choices every day about how we allocate our money and most of us chose to spend a portion on discretionary categories like morning coffee or going to a movie. The US Bureau of Labor Statistics estimates that we spend approximately 17% of our after-tax income on such purchases.
Based on government statistics, here how discretionary spending breaks out by category for various income bands. You can use this information to benchmark yourself against others in your income bracket and identify areas where you may be able to reduce expenses.
| Average Household | Lowest 20% | Second 20% | Third 20% | Fourth 20% | Highest 20% | |
| Number of consumer units (in thousands) | 118,843 | 23,738 | 23,773 | 23,765 | 23,770 | 23,796 |
| Annual income before taxes | 60,533 | 9,974 | 26,657 | 44,933 | 70,975 | 149,963 |
| Annual income after taxes | 58,101 | 9,969 | 26,346 | 43,799 | 68,497 | 141,738 |
| Discretionary Spending Categories | ||||||
| Food away from home | 2,694 | 1,055 | 1,660 | 2,404 | 3,292 | 5,058 |
| Alcoholic beverages | 497 | 213 | 294 | 474 | 534 | 971 |
| Apparel and services | 1,874 | 845 | 1,193 | 1,680 | 2,101 | 3,548 |
| Entertainment | 2,376 | 879 | 1,271 | 1,898 | 2,720 | 5,105 |
| Personal care products and services | 585 | 262 | 385 | 513 | 713 | 1,050 |
| Reading | 117 | 51 | 73 | 98 | 131 | 232 |
| Education | 888 | 505 | 295 | 477 | 879 | 2,281 |
| Tobacco products and smoking supplies | 327 | 266 | 345 | 367 | 374 | 282 |
| Miscellaneous | 846 | 454 | 510 | 674 | 939 | 1,652 |
| Total | 10,204 | 4,530 | 6,026 | 8,585 | 11,683 | 20,179 |
| Percent of After-Tax Income | ||||||
| Food away from home | 4.6% | 10.6% | 6.3% | 5.5% | 4.8% | 3.6% |
| Alcoholic beverages | 0.9% | 2.1% | 1.1% | 1.1% | 0.8% | 0.7% |
| Apparel and services | 3.2% | 8.5% | 4.5% | 3.8% | 3.1% | 2.5% |
| Entertainment | 4.1% | 8.8% | 4.8% | 4.3% | 4.0% | 3.6% |
| Personal care products and services | 1.0% | 2.6% | 1.5% | 1.2% | 1.0% | 0.7% |
| Reading | 0.2% | 0.5% | 0.3% | 0.2% | 0.2% | 0.2% |
| Education | 1.5% | 5.1% | 1.1% | 1.1% | 1.3% | 1.6% |
| Tobacco products and smoking supplies | 0.6% | 2.7% | 1.3% | 0.8% | 0.5% | 0.2% |
| Miscellaneous | 1.5% | 4.6% | 1.9% | 1.5% | 1.4% | 1.2% |
| Total | 17.6% | 45.4% | 22.9% | 19.6% | 17.1% | 14.2% |
Source: 2006 BLS Consumer Expenditure Survey
Since this is a large portion of spending, it’s easy for personal finance authors to recommend this as an easy category to cut, but it’s not always so easy. For some people, discretionary spending is so tight there’s not much to cut. And for most of us, discretionary spending is closely associated with the activities that add color and fun to our lives.
We recommend that you take a realistic approach to your discretionary spending. Rather than trying to eliminate all of it, try to make focus on the activities that truly matter to you while reducing those that don’t. For example, if you enjoy movies with your spouse, can you eat at home before the movie rather than doing movie and dinner? Can you reduce fast food convenience dining while keeping date night at a nicer restaurant? The trick is not to eliminate all spending, but to make your spending count.
The 2006 Consumer Expenditure Survey estimates that the median household with about $45K in pre-tax income spends about $8,500 per year in discretionary categories. Reducing this by 20-30% can free up $150-200 per month to apply to debt.
Actions:
- Identify five categories of discretionary spending that you feel you could reduce. Here are a few to consider.
- Entertainment (movies, concerts, magazine subscriptions, books, video rental)
- Clothing and apparel
- Dining (convenience meals, work lunch, morning coffee)
- Other (alcohol, tobacco, etc.)
- Personal case (hair styling, manicure, etc.)
- Estimate your current monthly spending in these categories
- Determine a realistic reduction for these categories and calculate a monthly total that you can save. Keep this realistic-you won’t be able to keep a promise to reduce all discretionary spending, so start small with some goals that you can achieve.
- Take a few minutes to write out your goal and think about how you will monitor it to make sure that you’re staying with your plan. Post your goal in a place where it will remind and motivate you.
When you have identified an amount that you feel comfortable that you can save each month, increase to your DebtGoal Monthly Commitment that you will apply to debt.
DebtGoal.com can help you create and track to a personal debt reduction plan.
Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
