What percent of your spending is "basic" and what percent is "discretionary"?

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1210sda
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What percent of your spending is "basic" and what percent is "discretionary"?

Post by 1210sda »

I've looked at our actual spending for the last several years and have concluded that about two thirds of our spending is for Basic expenses(food,shelter, etc.) and one third is for discretionary expenses.(Full disclosure:I did include some discretionary expenses in our "basic") :-)

There were several purposes for this analysis. Did we need to purchase an annuity? If we decided to follow a liability matching portfolio, how much spending did we need to cover? And, just in general, how much could we cut back if we had to.

What is your breakdown? (of course, using your own definition of basic and discretionary)

1210
ShowMeTheER
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by ShowMeTheER »

My household is also very near 2/3 (basic) and 1/3 (discretionary).

In basic, I tend to include: food/toiletries, shelter, gasoline, utilities, phones/internet/TV, auto/home/life insurance as the highlights.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by acejacksingh »

1210sda wrote:What is your breakdown? (of course, using your own definition of basic and discretionary)

1210
Background Info (I think it is important to include this for perspective):
Age: 26
Location: Washington, DC
Monthly after tax pay: ~$2400

Compulsory expenses:
Bills (rent, utilities, internet, etc) : $900
Savings (vacation, future expenses, etc): $500

Discretionary expenses:
Groceries: $300
Entertainment (eating out, movies, golf, etc): $300
Gas: $200
Other (random things, gifts, etc): $200

That's how it breaks down for me. So I'm about 58% compulsory and 42% Discretionary. The reason I include food in discretionary is because you can always cut down the quality of food you eat (especially since I'm single and live like a college student).
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kenyan
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by kenyan »

I started to do this, but eventually decided that my answer would depend more upon what my definitions were than what my spending was.
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The Wizard
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by The Wizard »

An excellent question.
Two years into retirement, I'd say it's roughly 50/50 but I may be lying. This is because I'm saving retirement income right now to allow me to buy a new pickup for mostly cash.
And vehicles are a basic expense, not discretionary...
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by BTDT »

87% Discretionary

Retired, house paid for, no debt, LCOL area, six digit income :beer
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by spectec »

I'd put it at about 2/3 basic and 1/3 discretionary.
Wife retired about 4 years.
I'm age 67, still working, but on a retirement glide path. (Actually secretly semi-retired)
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ResearchMed
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by ResearchMed »

kenyan wrote:I started to do this, but eventually decided that my answer would depend more upon what my definitions were than what my spending was.
This ^

Yes, "housing" is basic, but living in the relative luxury of our dream home is certainly discretionary.
When we "downsize" - most likely when the stairs become too much of a problem - then we'll need to think about whether we also want to "downsize" in terms of budget.
We could be very comfortable and also very happy in a "smaller place" or a "much smaller place", etc.

We'll probably purchase a somewhat luxury vehicle when our 13-year old Volvo XC-90 finally starts to cost us more.
A comfortable ride is becoming more important to our aging bodies...
But we might just get something fairly soon, for the new safety features, and we might keep updating every few years for that reason.

So how much of the housing budget (and vehicle costs) is discretionary?
We could scale down considerably if needed.
(And we might do so, if that meant we could do more travel, once DH has more time.)

We are very fortunate that we have this flexibility, and we never dreamed it would be this comfortable when we were each first starting out (VERY humble beginnings, and NO help from family along the way).

Unless we went apartment or condo shopping, AND we knew the budgetary constraints at that future time, we have no way to know "how much the basic" would be, etc.

This is all quite different from when we were just starting out, and the rents for the small apartments were a struggle, if we wanted a nicer neighborhood, not too far from work, etc.
There wasn't much "discretionary" back then.
(Sharing a small pizza, and drinking water was a "splurge".)

I think "stage of life" makes a huge difference here.

RM
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by Cindyjrn »

Are groceries really considered discretionary spending?
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by dsmil »

Our basic spending is 75% and our discretionary spending is 25%. Basic is anything that would continue for us in an emergency situation and discretionary is anything that wouldn't.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by 1210sda »

kenyan wrote:I started to do this, but eventually decided that my answer would depend more upon what my definitions were than what my spending was.
Kenyan,

I understand that this is driven by the definitions(and stage of life too). My thought was that if I get enough of a response, a general pattern would develop. I encourage to reconsider and submit whatever your percentages are.

Thanks
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heyyou
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by heyyou »

My proportions are near your 2/3 and 1/3.

Seems like many would be near that range, due to pre-retirement spending that was limited by mortgage cost, savings, kid's college, and taxes, all gone or reduced in retirement. Of course, our basic living costs are about the same as prior to retirement, just with more health care, and less gas and vehicle use.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by BTDT »

Cindyjrn wrote:Are groceries really considered discretionary spending?
Yes and no.

The two of us are averaging around $800 a month in groceries, and could easily cut back 50%. I used $400/month for groceries in determining basic versus discretionary.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by MathWizard »

Between 65% and 70%.

Discretionary includes paying for college and mortgage payment which will both be done within 5 yrs.
Once those expenses go away, we'll save most of it, but probably spend some on the bigger trips we
have planned before we are too old to enjoy them.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by IlliniDave »

Off the top of my head I'd say about 60% basic, 40% discretionary, although there's obviously some gray area in there. For example I would count travel as discretionary, but most of my travel is to visit family which I consider pretty important. In my actual spending plan I don't differentiate in any way between required and discretionary.

That breakdown is for what I actually spend and excludes any money saved and invested. It also excludes income taxes.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by Independent »

This is all about definitions.
Is my internet cost "basic" or "discretionary"? I use it a lot, but I know that I lived most of my life without it, and the library has free internet.
Same with air conditioning. I really like it, but I grew up without it...

I think the question only makes sense if I know how I'm going to use the answer.

Since the OP seems to be about retirement and annuities, I'd guess the definition might be
Basic - things that I don't want to give up just because the market had a few bad years in a row.
Discretionary - things that I'd be willing to give up because I took some investment chances and they didn't work out well.

For us, about the only thing I'd put in discretionary is some unusual travel. But, our spending is a little below the US average, and I feel that our prior income "should" at least cover the average.

The result is that we've arranged stable income sources that cover most of our spending. For us, it's very conservative investments to cover spending before age 70, then SS that covers most of our spending after that.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by The Wizard »

MathWizard wrote:Between 65% and 70%.

Discretionary includes paying for college and mortgage payment which will both be done within 5 yrs.
Once those expenses go away, we'll save most of it, but probably spend some on the bigger trips we
have planned before we are too old to enjoy them.
Hmmm...
Those expenses don't sound too discretionary RIGHT NOW...
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The Wizard
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by The Wizard »

kenyan wrote:I started to do this, but eventually decided that my answer would depend more upon what my definitions were than what my spending was.
Me, too.
I'm choosing to buy a new pickup truck soon, even though I don't desperately need two vehicles in retirement as a single person.
So I suppose part of the cost of this new truck, which replaces an older one, could be considered discretionary.
I don't think it really matters how I label it...
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by Cindyjrn »

BTDT wrote:
Cindyjrn wrote:Are groceries really considered discretionary spending?
Yes and no.

The two of us are averaging around $800 a month in groceries, and could easily cut back 50%. I used $400/month for groceries in determining basic versus discretionary.
Okay, that makes sense. My husband spends right around $900/month on groceries for a family of four with two teenagers. He's said there's not much fat to trim on that expense.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by TomatoTomahto »

Cindyjrn wrote:
BTDT wrote:
Cindyjrn wrote:Are groceries really considered discretionary spending?
Yes and no.

The two of us are averaging around $800 a month in groceries, and could easily cut back 50%. I used $400/month for groceries in determining basic versus discretionary.
Okay, that makes sense. My husband spends right around $900/month on groceries for a family of four with two teenagers. He's said there's not much fat to trim on that expense.
Your husband is a hero. Teenagers can eat, and so can their friends.
I get the FI part but not the RE part of FIRE.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by Cindyjrn »

TomatoTomahto wrote:
Cindyjrn wrote:
BTDT wrote:
Cindyjrn wrote:Are groceries really considered discretionary spending?
Yes and no.

The two of us are averaging around $800 a month in groceries, and could easily cut back 50%. I used $400/month for groceries in determining basic versus discretionary.
Okay, that makes sense. My husband spends right around $900/month on groceries for a family of four with two teenagers. He's said there's not much fat to trim on that expense.
Your husband is a hero. Teenagers can eat, and so can their friends.
He's very good about not providing them with too much ammunition. No candy, occasionally some cookies, no chips, no snack crackers. He buys fruit, cheese sticks, carrots. If you want a snack, eat an apple. But, you're right, he always says "they're eating us out of house and home."
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by MathWizard »

The Wizard wrote:
MathWizard wrote:Between 65% and 70%.

Discretionary includes paying for college and mortgage payment which will both be done within 5 yrs.
Once those expenses go away, we'll save most of it, but probably spend some on the bigger trips we
have planned before we are too old to enjoy them.
Hmmm...
Those expenses don't sound too discretionary RIGHT NOW...
Doh !

Discretionary is the college, since my son could pay for it with loans if needed. We want to give him
a good head-start.
The mortgage payment is non-discretionary.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by The Wizard »

Food is fundamentally non discretionary.
If you can define your meal expenses on a steady basis, I would say THAT is a basic expense.
The fact that I chose to eat lunch out each day at work and focus on seafood for dinner rather than rice & beans all the time caused my food expense to be higher than some other folks.
We're looking for ACTUALS here, not hypotheticals...
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by JDCarpenter »

The Wizard wrote:Food is fundamentally non discretionary.
If you can define your meal expenses on a steady basis, I would say THAT is a basic expense.
The fact that I chose to eat lunch out each day at work and focus on seafood for dinner rather than rice & beans all the time caused my food expense to be higher than some other folks.
We're looking for ACTUALS here, not hypotheticals...
I disagree; or, at least, this isn't true in all cases. The majority of our "food/groceries" bill is wine--and that subcategory is among our biggest nontax expenses. If push came to shove in retirement, cutting back to purchasing only cases that are cheaper than $25 per bottle, or even less, would be on the table. Plus, we have 30 months worth in the cellar, so we could just consume the sunk-cost bottles for quite a while if needed in the event of a 50% portfolio loss in retirement. Heck, if an asteroid hit, we could even quit drinking a bottle every night. That seems like it would fit just about anyone's definition of discretionary. :beer
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by knowledge »

I categorize my expenses as such, so it's pretty easy for me. For this year, ~62% of our spending will be necessary vs. 38% discretionary. There's definitely room to cut if we needed to.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by The Wizard »

Maybe we need more than just two categories then.
I tend to call almost all expenses related to maintaining my home lifestyle as Basic, including things like cable TV, periodical subscriptions, club dues, etc.
Maybe there should be an Enhanced Basic category also.

My primary discretionary expenses are travel related...
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by vveat »

Our emergency budget is 52% of the current spend - so discretionary is 48%. It assumes decrease in some categories (reduction to basics) such as groceries, some kids related stuff, etc. And increase in some categories such as healthcare.

Kid's preschool makes a good 20% of our spend, and is definitely discretionary. In a couple of years, once kid is off to public school, the discretionary ratio may drop to 35-40%. But again, our "basic" is already at pretty comfortable level.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by denovo »

A lot of people overestimate how high their basic spending is, if god forbid, you are in financial straits and need to cut back. Food spending can be cut easily by eating rice and beans, or other bulk staples, and cutting back on eating out and alcoholic or carbonated beverages. You can get rid of that high monthly car payment, by selling and getting a beater and lower your insurance costs. You can cut your own lawn , etc, etc.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by The Wizard »

denovo wrote:A lot of people overestimate how high their basic spending is, if god forbid, you are in financial straits and need to cut back. Food spending can be cut easily by eating rice and beans, or other bulk staples, and cutting back on eating out and alcoholic or carbonated beverages. You can get rid of that high monthly car payment, by selling and getting a beater and lower your insurance costs. You can cut your own lawn , etc, etc.
True, but I think it's better to determine the cost of maintaining the status quo, especially heading into retirement.
And that should include the cost of capital replacement, since few things last more than twenty years...
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by TradingPlaces »

1210sda wrote:I've looked at our actual spending for the last several years and have concluded that about two thirds of our spending is for Basic expenses(food,shelter, etc.) and one third is for discretionary expenses.(Full disclosure:I did include some discretionary expenses in our "basic") :-)

There were several purposes for this analysis. Did we need to purchase an annuity? If we decided to follow a liability matching portfolio, how much spending did we need to cover? And, just in general, how much could we cut back if we had to.

What is your breakdown? (of course, using your own definition of basic and discretionary)

1210
This is a very imprecise question.

In 2004, I was paying $400/M a sharing a 2 BR apt with a grad student housemate in a low cost of living city (top 30 in US)
In 2015, I am paying $4000/M in my condo with my wife in a moderately high cost of living cit (top 5 in US).

$1MM question: is my housing discretionary or basic? In terms of conveniences, I rank the two (2004 and 2015) housing situations very similar.

Similar things apply to car, clothes, etc. I took vacations as a grad student, I take vacations now. Now, vacations cost more. Is that basic or discretionary.

I was spending $25K a year as a grad student, counting everything: health insurance that was unsubsidized. One would argue that it is my basis.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by The Wizard »

TradingPlaces wrote:
1210sda wrote:I've looked at our actual spending for the last several years and have concluded that about two thirds of our spending is for Basic expenses(food,shelter, etc.) and one third is for discretionary expenses.(Full disclosure:I did include some discretionary expenses in our "basic") :-)

There were several purposes for this analysis. Did we need to purchase an annuity? If we decided to follow a liability matching portfolio, how much spending did we need to cover? And, just in general, how much could we cut back if we had to.

What is your breakdown? (of course, using your own definition of basic and discretionary)

1210
This is a very imprecise question.

In 2004, I was paying $400/M a sharing a 2 BR apt with a grad student housemate in a low cost of living city (top 30 in US)
In 2015, I am paying $4000/M in my condo with my wife in a moderately high cost of living cit (top 5 in US).

$1MM question: is my housing discretionary or basic? In terms of conveniences, I rank the two (2004 and 2015) housing situations very similar.

Similar things apply to car, clothes, etc. I took vacations as a grad student, I take vacations now. Now, vacations cost more. Is that basic or discretionary.

I was spending $25K a year as a grad student, counting everything: health insurance that was unsubsidized. One would argue that it is my basis.
No confusion whatsoever on the above.
Your housing expense is 100% basic expense. Assuming a mortgage in there, it could decrease when paid off.
The issue is: maintaining the current status quo, not one from a previous time.

The vacations are 100% discretionary, no matter how long you've been taking them...
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by Sheepdog »

Retired couple
Total spending in 2014 plus year to date 2015 (1/1/2014 to 6/22/2015) = $99,204 of which 48.7% was basic and 51.3% was discretionary which means that we could spend a lot less if we needed to yet still be living fairly okay, but not as nicely as we are fortunate to be able to do.
I included in discretionary spending: special house remodeling, charity donations, restaurants, entertainment, sports season tickets, bird feeding, landscape plantings, vacation, cable, dsl, volunteering expenses.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by bigred3 »

HCOL area and 28 years old:

55% basic/45% discretionary
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by kramer »

I found this exercise too difficult to complete. I think I just don't track my spending in a detailed enough fashion. And I find a lot of purchases ambiguous. Also, I don't consider things like internet or trips to visit family in the USA mostly discretionary.

I found myself dividing up categories. I just bought a $600 laptop, but I guess that about $150 of that was discretionary. The $100 bluetooth headphones I just bought were definitely discretionary. I have just made a number of discretionary clothing purchases, but having these clothes will delay necessary clothing purchases in the future. I have great eye glasses and enjoy wearing them, but I just bought $220 worth of contact lenses that I use for sports, often just for daily wear, etc. Technically, they are at least mostly discretionary. I just got bogged down.

I am pretty sure that I wouldn't want to go below 75% of current spending (even though I *could* go lower) but I am really just guessing.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by dbr »

All of my spending is both basic and discretionary. The distinction is absurd.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by edge »

I would guess 90 % discretionary but don't track closely.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by castlemodesto »

in considering liability matching I dont think of basic and discretionary , but what is HIGHLY IMPORTANT (to achieve a meaningful, happy retirement) and what are aspirations ( what would be nice, but not significantly enhance). To be able to pay for travel to visit family members is not a bare bones essential basic expense, but personally is highly important. To do a river cruise in Europe is an apiration. I am sure I would enjoy it and I hope to do it one day. But I also know a no cost local camping trip with friends would also be memorable. My goal is to have guaranteed income for all personally highly important expenses ( eg monthly movie outings, club memberships) . Other aspirational expenses I am happy to indulge in at the whim of the markets, given that the markets are likely to provide higher aspirational spending than "guaranteed" liability matching such as annuitizing or TIPS. Of course as Michael Kitches keeps saying, you can consider a 2% withdrawal on balanced retirement savings as part of your liability matching as it is pretty much "guaranteed". You dont really have to annuitize or TIPS unless a 2% withdrawal wouldnt cover your highly important expenses.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by katsmeow »

I don't find basic/discretionary very useful. At some level, most of our food and shelter expenses are discretionary since we could live on less if we had to.

A couple of concepts I've found more useful are:

1. Committed - A committed expense is one that can't be unwound very quickly easily. It may be entirely or mostly discretionary, but you can't cut it off immediately. If I've committed to pay for private school tuition for a year that is a committed expense. It may be discretionary, but it is committed at the moment.

If I have pets, their expenses are committed. Yes, I could (theoretically) shed myself of the pets, but until I do I have those expenses.

2. Regular v. Irregular coupled with Fixed/Variable - The mortgage is fixed regular. The electric bill is variable regular. Auto repair is irregular/variable. And so on.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by nordlead »

Going by categories that are typically considered basic (housing, utilities, food) or discretionary (shopping, restaurants, misc) my breakdown for the last 12 months is 82% basic, 18% discretionary.

If you wanted to go into more details, it would probably trend closer to 72%/28%, as the extra principal payments on the mortgage would come out of basic, and there are probably some discretionary expenses in the grocery and utilities categories.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by Ron »

100% basic, 0% discretionary.

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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by Rodc »

The original question seemed framed in the context of retirement planning.

When I retire in the not too distant future our expenses will be very different from today.

Today I am saving for retirement and college. I am paying into social security, etc. I am feeding two teenage boys. I am sending two teenage boys to summer camps, extended boy scout trips, paying for music lessons, etc.

I may or may not retire before they finish college, but regardless, college will mostly or completely be paid for out of savings and will not last long into retirement in any case.

So all of those expenses will go away.

How much retirement income we will have hinges very much on how much we spend bridging the gap between retirement and starting SS and pensions which in turn hinges to a huge degree on what age we retire. Our expenses and income depend on where we decide and how we decide to house ourselves in retirement. Sell house in very HCOL area to buy something modest in a LCOL area will result in a different financial situation vs staying put.

All of this means that the relevant question: "What percent of your retirement spending is (expected to be) basic vs discretionary?" is very hard to answer, but at any rate is to some degree controllable by adjusting how we choose to house ourselves and other decisions. In other words I suppose one could say we can adjust the answer by adjusting the definitions of basic and discretionary.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by dbr »

Rodc wrote: In other words I suppose one could say we can adjust the answer by adjusting the definitions of basic and discretionary.
What basic is is discretionary.
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Re: What percent of your spending is "basic" and what percent is "discretionary"?

Post by Rodc »

dbr wrote:
Rodc wrote: In other words I suppose one could say we can adjust the answer by adjusting the definitions of basic and discretionary.
What basic is is discretionary.
As things exist now I will enter retirement with a small mortgage payment. I could in principle sell and buy elsewhere and have no mortgage (and enough money left over to materially increase my retirement income, which also effects the answer of what % is basic vs discretionary). I think there is room for folks to take different positions as to whether or not the mortgage payment is basic or discretionary. I have to live somewhere, and the house is fairly basic, just valuable because of the land it sits on. So one might judge that to be a basic cost. On the other hand if needed we could certainly reduce our expenses by moving to another area, and would if pinched, so arguably the mortgage is discretionary.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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