All of us like to save enough to meet our life goals. But not many of us succeed in doing so because of our spending habits. Now, you can choose to avoid discretionary spending.

But what distinguishes discretionary spending from non-discretionary spending? And why is discretionary spending important to you? Can you then create portfolios to meet your discretionary spending needs? Your monthly living expenses, such as food and rent, are part of non-discretionary spending.

That is, you have to incur such expenses to sustain your basic standard of living. This amount is somewhat stable every month, unless you dramatically change your lifestyle.

Discretionary spending Your discretionary spending, on the other hand, could change every month. By its very nature, discretionary spending refers to expenses not required to meet your basic standard of living. It includes a range of expenses from not-so-large amounts spent relatively frequently on fine-dining to infrequent lumpy purchases to acquire passion assets. These are assets you buy — collectibles such as paintings and rare coins that can be resold at a higher price at a later date.

You would spend more on passion assets during your working years, especially between mid-career and retirement. You are likely to frequently spend not-so-large amounts immediately after retirement.

This is because you will have more leisure time after you retire when you may spend on fine dining, short vacations and social meetings. Spending on passion assets during your retirement will significantly increase your discretionary spending.

If you consider discretionary spending as a life goal and create an investment portfolio to generate the required cash, two factors are worth noting. One, such a goal will have moderate priority. It can be postponed and, hence, will not have top priority, quite unlike the goal of education for your children. And two, you are most likely to invest in high-risk, high-return investments to achieve your discretionary spending goal. Otherwise, the money that you will need to set aside for achieving such a goal will be larger. But why should you incur discretionary spending? Should you necessarily create an investment account to meet your discretionary spending needs?

Investment portfolio You should incur discretionary spending throughout your life. Spending provides external satisfaction by way of owning material objects in contrast to inner satisfaction. You are unlikely to derive external satisfaction from buying groceries or paying rent every month.

The fact is that discretionary spending drives you to aspire for more, which in turn, prompts you to work harder. Otherwise, you are likely to have a monotonous lifestyle! Discretionary spending also arises due to conspicuous consumption — material goods and services that you consume to impress your neighbours and friends about your level of wealth.

Your discretionary spending is likely to reduce on an absolute basis after you cross the age of 70. If you are a working executive and your discretionary spending relates to not-so-large frequent expenses, you should meet such expenses with your current income after setting aside money for high-priority goals.

If you are a retiree, you should meet such expenses from the portfolio earmarked for your leisure expenses. If you want to spend on passion assets, you should create goal-based investment accounts as such expenses are lumpy in nature. Such investments form part of your core portfolio. You could also use profits from your satellite portfolio for your discretionary spending needs.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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