For me at least, what makes a budget item a necessary or discretionary expense is whether I can accept living indefinitely without it and not regret it. At its most mundane, I would regret never eating steak — but I can (and do) live indefinitely without eating porterhouse or filet mignon. At the other end of the spectrum, I would regret living in an apartment — but I can (and do) live indefinitely in a modest country home. Differentiating between what one must have as a lifestyle baseline and what would be nice for one to have is a subjective process. Here is where that thinking has led in my own case.
Housing (location, size, type and features) is a really major expense for everyone. And so it has been for me. I have concluded that I “need” a house located further south (than Maryland) for milder winters… with enough land around it to buffer me from my neighbors… with a garage/workshop to shelter my vehicle and do DIY work… and with a basement for storage. Without these elements, my retirement housing would not really work for me. So — for me — having these housing features is a necessary (that is, baseline) budget expense. But I do not need a fancy address, or a swimming pool, or an urban location, and so on. Each one of those would be a discretionary expense to me.
Transportation is another major budget item for almost everyone, including me. Here I have concluded that I just need reasonable reliability, safety and driving comfort. I will not pay with 10 years of my remaining life for vehicular newness, prestige, status or any other intangible feature of a new or so-called luxury vehicle. So I have excluded a car payment from my baseline retirement budget because it would definitely be a discretionary expense for me.
And so on line by line down my entire budget.
This baseline versus discretionary expense analysis has led me to continuously optimize my spending — budget line item by line item — so that I have now lowered my baseline budget by 42% from what it used to be without giving up my baseline lifestyle. That in turn has made a greater part of my income available for discretionary expense, but in a more flexible way not tied to any fixed outlay such as a monthly boat payment. But it goes deeper than that.
This analyzing and differentiating of necessary versus discretionary expense enabled me to determine, in detail, what my version of a baseline no-regrets lifestyle requires and what its costs are. Doing that led me to lower my “retirement stash magic number” to such a degree that I became financially independent much sooner and thereby added many, many years of retirement freedom to my life. And how do you put a price on that?
The takeaway: Every expense is either a baseline necessary expense or an optional discretionary expense. Being aware of the difference is a crucial step towards the achievement of financial independence. But knowing which expenses are baseline and which are discretionary is not always obvious – and it’s always subjective. So each expense needs to be analyzed and thought through in the context of one’s own lifestyle values. Going through that process — and applying what is learned from it — will pay off in a much faster track to financial freedom and life satisfaction.
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image courtesy of Stuart Miles at FreeDigitalPhotos.net