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Do not save what is left after spending, but spend what is left after saving. – Warren Buffett
The first finance lesson every individual should learn before starting his investment journey is to spend what is left after savings. Prioritise your vital expenses in the spending area as well.
The disposable income of households should be properly prioritised. Especially in the case of dual-income households where the disposable income is high, channelising the disposable income plays a major role.
Otherwise, this will create a tendency to spend on unnecessary (luxury) items. This article will throw light on discretionary spending & how to channel it effectively.
Table of Contents
1. Budgeting
2. Discretionary Expenses
3. Tighten your belt – Economise
4. Trade-off
5. Illustration
6. Escape The Vicious Cycle
7. Conclusion
“An investment in knowledge pays the best interest.” — Benjamin Franklin
The first step to saving better is to cut down on our unnecessary expenses.
But, how can I cut down on unnecessary expenses?
“Knowledge”.
Yes!
How can a doctor treat a patient without the proper diagnosis?
This applies to handling our finances as well.
We cannot save and invest better without knowing where the potholes are through which our money gets drained.
All of us have this thought of handling our finances better. Right?
But have you ever thought about what makes us not take the necessary steps?
Laziness is one obvious reason, but there is something I would like to tell you beyond the obvious.
It is because we think that there is no point in saving small leakages in our monthly and everyday expenses. We consider that they don’t have much value in the vast ocean of life.
Today we are going to look into those “not-so-important” expenses to find out how the cost of these expenses compounds into a large corpus years later.
There are an ‘n’ number of everyday expenses that create a hole in our savings and health.
Just an analysis of ‘3’ of these everyday expenses would give you a larger picture of the amount that gets carried away from you without much awareness.
After seeing the cost of these expenses in the long term and the huge revelation of the effects of compounding, it’s up to you to decide what you want to do with those expenses.
First, Let’s see the steps to find those expenses that drain our pockets.
1. Budgeting
Budget your expenses for each month. You may have a digital copy of your budget or use any Apps or even a few people like to physically write it down with pen & paper.
After that, you need to write your future financial goals & categorise them Viz. Short, Medium and long term. Because you need to save for some financial goals (children’s education, Retirement) & you need to pay for some financial goals (Housing Loan). Budgeting is all about creating a plan to accomplish all your dreams & financial goals.
2. Discretionary Expenses
Creating a plan (budget) & sticking to it is one of the best money habits. This will eliminate discretionary spending. In the context of personal finance, discretionary expense refers to non-essential or optional spending that is not necessary for basic living. This could vary depending on personal preference, lifestyle choice & financial capacity.
Netflix once tweeted that its competitor is Sleep & Coke owners said that cola’s real competition is Water. The above pictures (content from social media) clearly show that we are ready to spend on alluring things & alternatives are available at no cost. These two are examples of discretionary spending & we have quoted a few more below.
Dining Out and Entertainment: Expenses related to eating at restaurants, going to movies, concerts, or other leisure activities
Travel and Vacations: Funds spent on vacations, travel expenses, and holiday getaways
Luxury Items and Upgrades: Purchasing luxury goods, premium brands, or high-end fashion items
Non-Essential Subscription Services: Expenses for streaming platforms, magazine subscriptions, or other non-essential services
Non-Essential Electronics and Gadgets: Purchasing gadgets and electronic devices beyond basic needs
3. Tighten your belt – Economise
The above list of discretionary expenses is just a sample. Individuals can exercise control over their spending choices based on their preferences and priorities, which may vary depending on personal circumstances.
You may face difficulties when allocating limited funds among competing priorities. The more you have clarity on your financial goals & monthly expenses, the better you could cut off these expenses. The amount saved on unnecessary spending could be carefully routed to your wealth accumulation path.
4. Trade-off
The next step is how to divert discretionary spending into the wealth creation path. Thereby you can accomplish your financial goals comfortably & early.
You may think that spending a few bucks daily or monthly isn’t a big deal. Remember that a small leak will sink the boat. There should be a trade-off between your necessities & luxuries. Though the benefit of this trade-off couldn’t be reaped in the short term, you will yield fruitful results in the long run.
Smoking is one of the discretionary expenses. One could quit smoking & save the money spent on this for other financial goals or any big-ticket expense.
The above picture depicts, how you could save for your future by swapping the cigarettes for an SIP. The cost of smoking in 30 years is 1.30 Crores. If this amount is invested all through the years, the accumulated corpus at the end of 30 years is 5.05 crores (Return assumption 12%). This shows that the power of compounding works at its best in the long term.
Similarly, any OTT Subscription like Netflix, Sony Liv, etc., eating out on weekends, or going on trips could be swapped for your financial life goals. Often your bonus evaporates in your pocket. Better save it for something you really want.
5. Illustration
To understand the concept of a penny saved as a penny earned, let us do some number crunching. We have taken 3 discretionary expenses for our analysis. The cost of the products assumed here is approx. (closest to the nearest 100). The assumed rate of return on investment is 12% p.a. Let us calculate the accumulated corpus at the end of 30 years.
| Monthly | Yearly | Total Amount Invested (Step-up) | Final Corpus (Return -12%) | ||
| Coke | 2.25 Litres – ₹100 | 400 | 4800 | 3,79,479 | 23,16,021 |
| Netflix | Premium Plan | 650 | 7800 | 8,83,609 | 46,03,023 |
| Smoking | Per day 5 Cigars costing ₹ 12 each = ₹ 60 | 1800 | 21600 | 35,53,071 | 1,59,01,422 |
Coke – A 2.25 Litre pet bottle would be approx. cost ₹ 100. If an individual consumes one bottle a week, it costs ₹400 per month. This amount could be diverted to SIP Investment. Here we have assumed an inflation of 6% p.a. The total amount invested with a step of 6% per annum is ₹ 3.79 Lakhs. If you could avoid drinking Coke just one pet bottle in a week, the final corpus accumulated is ₹ 23.16 lakhs.
Netflix – A premium plan would cost ₹ 650 per month. If you could save this amount & invest the same, then you could have saved ₹ 8.83 Lakhs (Assuming inflation – 8%). The final accumulated corpus under this scenario is ₹ 46.03 Lakhs. This amount could be utilized for any of your financial life goals.
Smoking – The earlier two scenarios burn a smaller hole in your finances, whereas smoking would cause a bigger hole in your finances than you could imagine. If a person is spending ₹ 60 per day, then the monthly expense would be ₹ 1800. Assuming an inflation rate of 8% p.a., the amount spent on cigars in 30 years would be ₹ 35.53 lakhs. The accumulated corpus would be ₹ 1.59 crores.
Now, it’s time for some actual figures (Real-time market value). We have chosen a mutual fund scheme for our calculation. Here is an example of what would be the future value of saving just 10k per month over 30 years.
| Fund Name | Kotak Emerging Equity Scheme Growth |
| Monthly Instalment | ₹ 10,000 |
| Annual Step-up | 5% |
| Tenure | 20 years (1 Jun 2013 to 28 Jul 2023) |
| Accumulated corpus | 1,21,82,371 |
| CAGR | 11.00% |
For calculation purposes, we have taken Kotak’s emerging equity scheme. The monthly SIP is ₹ 10,000 with an annual step-up of 5%. The final accumulated corpus at the end of 20 years is 1.21 crores. The CAGR is 11% p.a. This is a big deal of amount which helps you to fund any of your financial goals.
If you could control your habit of splurging, you could invest the same for your future financial goal.
6. Escape The Vicious Cycle
“It is always the small things that make a big difference”
Did it ever cross your mind that Coke, Netflix, and Smoking have such a large effect on your finances?
We have illustrated how cutting down just these three expenses will help you become a crorepati in the future.
What will be the outcome of finding and cutting down all the unnecessary expenses that drain our money?
Now imagine, how many crorepatis would be living among us if they implement these simple steps in everyday life.
Even though it is up to you to spend your hard-earned money the way you want.
The point of this analysis is to explain to those people, who have the wisdom that these expenses are not essential for a healthy life. But are hesitant to cut down on them because they are not aware of the large hole this creates in their savings and the large corpus it generates in the future.
7. Conclusion
Be mindful of your discretionary spending as it can significantly affect your financial health. You can wisely allocate the funds by Budgeting & managing your expenses.
By understanding the difference between necessary and discretionary expenses, you can make informed decisions about you spending priorities and work towards financial stability and success. Balancing discretionary spending with necessities is crucial as it ensures wealth accumulation in the long run.
Are you new to the world of investment and Financial Planning? Instead of looking for financial advice on social media platforms like Quora, Twitter, Facebook, etc. It is better to take the help of a professional financial planner.
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