Know your expenses

When economists craft how to think about happiness it is often measured by the utility received from wealth.   More wealth is preferred to less wealth.  For an individual, more utility is gained from more wealth.

How wealth is spent is a measure of living standard.   The basics of life, such as the necessary food, housing, and clothing to sustain life are non-discretionary expenses.  Expenses that are "off the top" before enhancements to life can be undertaken.  Discretionary expenses are those enhancements.  They raise a living standard for an individual or a household.   For most, they make life better.

Why is the difference important?  Discretionary expenses measure the living standard.  More choice over those monthly expenses and the ability to spend more raise an individual or household's level of happiness.  At least from an economist's perspective.

The graphic shows a breakdown of different types of expenses for an individual with after-tax income of $3,802/month.  Non-discretionary expenses are sometimes in the eye of the beholder. Normally,  housing, utilities, and insurance are non-discretionary much like paying taxes.  Discretionary expenses are categories of fun.  Whether the total of all expenses exceeds income determines savings.  In this case, the household has negative savings which is probably facilitated by using a credit card to borrow to finance spending.

Importantly, we can not say anything about whether this household is spending too much.  If income is jumping in the future, investments have performed marvelously or the household will be inheriting money, then negative savings may be a best financial planning strategy.

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