Discretionary vs. Mandatory Spending: What’s the Difference?

Highlights:

• Mandatory spending refers to necessary expenses that your household or business cannot do without, whereas discretionary spending refers to nonessential costs.
• One key to managing your personal finances — and keeping your expenses in line with your income — is balancing your mandatory and discretionary costs.
• In the context of the federal government, discretionary and mandatory spending refers to how the U.S. Congress appropriates funds for various programs.

Your spending can generally be grouped into two categories: mandatory and discretionary. Learning to manage mandatory and discretionary expenses is critical to achieving a balanced budget — but first, you'll need to understand the difference between the two categories.

What is mandatory spending?

Mandatory spending refers to necessary expenses that your household or business cannot do without. For individuals, this typically includes day-to-day needs like housing, food and medical care. For businesses, mandatory expenses might include rent, payroll and operating costs.

In short, mandatory spending, whether business or personal, refers only to essential spending. Consider your own household: What costs must you cover in order to survive? Standard mandatory expenses could include the following:

• Rent or mortgage payments
• Transportation costs, including auto loans, car insurance and gas
• Student loan payments
• Healthcare expenses, including insurance premiums
• Utilities, including electricity, water, internet and phone bills
• Food and other groceries
• Childcare

What is discretionary spending?

Discretionary spending, on the other hand, refers to nonessential costs that are not required to keep your household or business running. For individuals, discretionary expenses may include dining out, entertainment (such as concerts, movies and streaming services), gym memberships, leisure travel, gifts and charitable donations. For businesses, common discretionary expenses include marketing, research and development, office improvements and employee perks.

How to identify discretionary and mandatory spending in your budget

It's best to distinguish between mandatory and discretionary spending in terms of needs and wants. If you don't pay your rent each month, you'll be evicted, so your rent is a need. Likewise, if you don't pay your power bill, your electricity will be shut off by the utility company. These expenses are categorized as mandatory spending because they're required to maintain your everyday life.

Discretionary expenses, however, are the things you can do without. You'll focus on your discretionary spending to pare down your budget, save money and avoid a financial crisis. When your personal or business income shrinks, so should your discretionary spending. Your mandatory spending, on the other hand, will likely remain steady.

This all comes into play when it's time to create a budget. Together, discretionary and mandatory spending make up your total budget. The key to managing your finances — and keeping your expenses in line with your income — is maintaining an appropriate balance between your mandatory and discretionary costs.

Discretionary vs. mandatory spending for the U.S. government

You may also hear the terms mandatory and discretionary spending in reference to the federal budgeting process.

In this context, these terms refer to how the U.S. Congress decides how much money to spend on federal, state and local programs.

Mandatory government spending isn't subject to the annual congressional budgeting process, meaning it does not need to be debated or negotiated. Instead, this spending is determined by existing budgetary laws. Entitlement programs are categorized as mandatory spending, as are congressional payments made to states, local governments and businesses.

Discretionary government spending, on the other hand, is determined each year through congressional appropriations — the process by which the U.S. Congress negotiates how funds are spent based on current economic, political and other factors. For example, during wartime, Congress might allocate more money toward defense spending, while they might allocate more funds toward the Centers for Disease Control during a health crisis. Defense spending is discretionary, as is government spending for housing, education, agriculture, research, infrastructure development and other special programs.

Just as individuals do with their personal budgets, it's important for Congress to carefully manage mandatory and discretionary spending in order to avoid exceeding the federal budget and creating a deficit. Whether you're working on a budget in Congress, for your business or at home at your kitchen table, understanding the difference between mandatory and discretionary spending is key.