Estimating non-discretionary spend

Spending falls into the two camps: discretionary and non-discretionary. Of these, non-discretionary spend is the one to have a handle on for managing both day to day finances and long term projections.

The best way to calculate the figure is to have an annual view. This is because some non-discretionary expenses are annual (e.g. insurance), monthly (e.g. subscriptions) or weekly (e.g. food).

Every three months, I download the last 12 months spend transactions from my current account. I delete items that are just transfers between accounts and then scrutinise the rest for one-off, non-repeating spend.

For example, I bought a car, which is not something I’ll do every year. I also deleted a new wall that was built in the garden. However, I don’t delete the plumbing repairs, day trips or other one-offs because I’ll be incurring similar things in future. It’s the value of non-discretionary spend as it relates to your lifestyle that you are looking to estimate.

Another way to do this is to sort by value and just look at items over say £500.

Once you have that number, you can use it in your forecast models, to size your emergency fund and just for general budget purposes.

If you repeat this every quarter, you will build up a view of how stable this number is, and also you’ll be keeping it up to date with inflation. Hopefully you’ll find that it doesn’t vary much in structure, and it will help inform what you do with disposable income above this amount (shared between discretionary spend, saving and investing).

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I am not your financial adviser.

The information in this post relates to my financial journey. It may or may not be relevant to your own. You need to make your own decisions on your own financial strategy.

Do not buy or sell anything based solely on what you read.